With Europe and the regional Euro currency teetering on the edge of a cataclysmic crisis, politicians and central bankers are scrambling desperately to save their cherished dream of the European Union. All the supposed rules have already been broken as the continent’s rulers prepare ever-greater bailout packages for bankrupt governments and big banks.
EU leaders are vowing to do — and spend — whatever it takes to save their hard-won supranational regime. The fiat monetary system and debt-ridden member states with bloated budgets will be preserved at all costs, too. Or so they claim.
Analysts and markets, however, don’t seem convinced. European stocks are still down sharply from just a few months ago. With the giant Franco-Belgian bank Dexia becoming the most recent bank to face implosion, more than a few massive financial institutions are still headed off a cliff. And the Euro has taken a serious beating recently against the dollar — a currency that is itself facing major trouble — even as experts predict greater losses and possibly the collapse of the regional monetary system altogether.
Policy makers, meanwhile, are having none of it. German Chancellor Angela Merkel, for example, just promised more taxpayer-cash injections to the banks if needed. EU Commission President Jose Manuel Barroso is advancing a “coordinated” recapitalization of the financial system in an effort to build confidence.
Brussels is also plotting to create a slush fund for “stabilization” purposes that could be worth more than $5 trillion – close to half of the bloc’s GDP. And Eurocrats are still scheming to start issuing “Euro bonds” to raise much-needed funds.
Even the International Monetary Fund — and the U.S. taxpayer by extension — is working to bail out Europe. The IMF recently hinted at possible intervention in bond markets, too. And the European Central Bank (ECB) is furiously printing money and showering it on bankers and governments.
Despite the brief respite offered by soothing promises of ever-greater sums of taxpayer money, however, the economic outlook for Europe and the Euro is bleak. Each new proposed “solution” causes more confusion.
Voters in countries footing the bailout bills are rapidly growing restless — as are citizens in countries on the receiving end of loans. Analysts are largely pessimistic, too. Many are predicting the equivalent of economic Armageddon.
The Euro is “practically dead” and “beyond rescue,” noted UniCredit Global Securities chief Attila Szalay-Berzeviczy in a recent editorial that sent shockwaves through Europe. “The only remaining question is how many days the hopeless rearguard action of European governments and the European Central Bank can keep up Greece’s spirits.”
According to Szalay-Berzeviczy, the former chairman of the Hungarian stock exchange, the coming Greek default will trigger an instant “magnitude 10″ earthquake across the continent. Bank runs and more riots will quickly follow as bond holders suffer massive losses.
Many experts expect a tidal wave of defaults and bankruptcies of unimaginable proportions to follow — a tsunami so large that no amount of bailouts will be able to slow it down. And finally, Europe’s economies, governments, and welfare states — along with the perpetually growing apparatus headquartered in Brussels — will all come crashing down.
“What comes next is the explosion of the European project,” wrote Bret Stephens in the Wall Street Journal last month, noting that the collapse of the project would not be altogether bad — but the cost will be massive. “The riots of Athens will become those of Milan, Madrid and Marseilles.… Border checkpoints will return. Currencies will be resurrected, then devalued.… It’s a long, likely parade of horribles.”
The problem is systemic and, at this point, unavoidable. “What is now happening in Europe isn’t so much a crisis as it is an exposure: a Madoff-type event rather than a Lehman one,” Stephens noted. “The shock is that it’s a shock.”
Even former U.S. Federal Reserve boss Alan Greenspan, who went from gold bug to fiat-money cheerleader over the course of his career, is pessimistic about the single currency’s prospects. “The euro is breaking down and the process of its breaking down is creating very considerable difficulties in the European banking system,” he told a conference in late August, noting that the unfolding crisis could have a strong negative impact on the U.S. economy as well.
Author and economic analyst Gary North also predicted recently that the Euro will soon break down and the EU will fall apart. “It is not going to be reversed,” he noted. “The New World Order’s number-one poster child — the European Union — has begun to fall apart. Nothing will reverse this.”
While the cost of the coming meltdown will be high, North called the unfolding drama a “victory of liberty” over centralization. “The [EU's Economic and Monetary Union] is based on a common central bank and a common fiat currency,” he explained. “But without a common system of government, there can be no fiscal union. There can be no central planning by Keynesian means.”
Other analysts, however, believe that further centralization will actually be the end result — especially because the effects of a currency break-up would be so devastating in the short term. “Our base case with an overwhelming probability is that the Euro moves slowly (and painfully) towards some kind of fiscal integration,” noted a UBS Global Economics report authored by chief Paul Donovan and his team. The document claimed popular talk of the currency’s demise underestimated the consequences of such a scenario.
Citing political, economic, and social costs, Donovan’s report painted a gloomy picture of what a Euro break-up might look like. “It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war,” the document warned.
So, while the Swiss banking behemoth UBS acknowledged serious structural flaws with the Euro, the bank’s economists still think the currency will probably be around for a while. Economic pain, bailouts, fiscal transfers, and closer integration are simply the price that must be paid to avoid calamity — up to and including civil war and dictatorial rule.
European policy makers seem to agree. To them, no price is too high to save the Euro, whether it be trillions in bailouts or a complete obliteration of what little national sovereignty member states still cling to. EU Commission boss Jose Manuel Barroso (unsurprisingly) made that perfectly clear: He called for, among other measures, more of the very same “integration” policies that critics say caused or intensified the crisis in the first place.
“Today, we are facing the biggest challenges that this union has ever had to face throughout its history — a financial crisis, an economic and social crisis, but also a crisis of confidence,” Barroso declared on October 5, calling for a stronger central government and a new tax paid directly to the supranational regime. “If we do not move forward with more unification, we will suffer more fragmentation.”
Many experts believe more European integration would be absurd and destructive. But Barroso’s demands are only the most recent manifestation of a pattern that has become obvious during the growth and development of the EU and the Euro: If there is a problem, more centralization is called for to fix it; if all is well, it simply shows how great integration has been, and that more is needed.
Voters, however, are getting fed up. They might not be willing to take it for much longer, if recent elections and polls are considered. Will the Euro collapse, dragging down the EU with it? Possibly. But if it does, it won’t be because integration advocates — the real “elite” — did not try their hardest to prevent it.
Pain, or More Pain?
Countless prominent analysts have forecasted the imminent doom of the Euro for years. Yet each time the currency looked ready to crash and burn, politicians and Eurocrats spared no effort to douse the fires with taxpayer money.
But the flames keep raging back — bigger and stronger with each succession. And this time, according to experts, there might not be any more temporary fixes to keep the whole structure from finally burning to the ground.
There are, of course, a variety of scenarios that could unfold in the coming weeks and months. None of them are pretty. But exactly how it goes down is less important than the fact that more economic hardship is on the way.
Greece will almost certainly default — probably as soon as toxic Greek bonds can be shifted from banks’ balance sheets onto the backs of taxpayers. Whether that triggers a domino effect and brings down other PIIGS remains to be seen. Many analysts suspect that it will.
Even if it does not, however, the number of European governments drowning in increasingly large oceans of debt is still climbing. And any default — even the appearance of default — would likely push some banks over the edge.
On the other hand, European banks could begin collapsing first. Talk of breaking up or taking over Dexia, for example, is already ongoing. Governments are promising to step in if needed. But they are having trouble raising money themselves — not to mention political support.
Analysts are warning that the implosion of a major bank could, like a government default, cause a domino effect throughout the region. If the banks or governments are allowed to fail, panic could set in among investors, wreaking havoc on global markets.
But if everybody except the taxpayer continues to get bailed out — as European rulers are threatening — inflation or even hyperinflation could set in. Then there is the moral hazard, the acceleration of wealth destruction, and countless other problems associated with bailouts — not to mention the fact that taxpayers will eventually reach a breaking point.
The Euro crisis, of course, will hardly be contained within the crumbling walls of “Fortress Europe.” Fear is already beginning to take hold worldwide. The U.S. economy and the American dollar, which aren’t doing much better than Europe’s, would suffer as well. Even if the dollar benefits in the short term as panicked investors flee the Euro, the ongoing crisis of confidence in fiat currencies could quickly explode.
The blame, as usual, will almost certainly be pinned on “capitalism” or “speculators” — never on big government, centralization, and central-banking gimmicks. But in reality, the Euro scheme — even more so than other fiat debt-money systems — was fatally flawed from the start. And its architects and their arguments should be the ones taking the fall.
Solving the Problem
Europeans have had the supranational governance and monetary system foisted on them largely against their will. When countries voted down the constitution, for instance, it was simply re-packaged and jammed down their throats anyway. Now it is time for the consequences.
Many factors contributed to the bloc’s escalating crisis, including big-government policies and the role played by socialist rulers from Portugal and Spain to Greece (for more, read “Lessons in Statism from the European Crisis“). But the most important source of the continent’s troubles is almost certainly the monetary system.
Like most central banks, ECB creates money out of nothing and loans it out at interest. Because the money to pay the interest on the principal was never created to begin with, it becomes literally impossible to pay off the whole debt, even if every penny is sucked out of the system. More debt money must be constantly created to avoid a total collapse of the system.
Other inherent flaws with modern central banking contributed to the current crisis as well. In a free market, for instance, interest rates would be determined by market forces — the rate of savings, risk, and demand. But under today’s system, interest rate “targets” are established by central bankers who manipulate the money supply to achieve their goals.
Central planning, as almost everyone knows, is always and everywhere a failure (see North Korea). And when interest rates are centrally planned, similar problems emerge. Malinvestment becomes systemic as producers use artificially established prices for borrowing to make decisions. The so-called “boom and bust” cycle takes over and destroys an untold amount of wealth.
In the case of the Euro, centrally planned interest rates produced even more disasters than they would under normal circumstances. Rates across the region — with its widely divergent economic conditions — could not be tailored to suit each economy, even if the planners were entirely benevolent and all-knowing. So while a 2 percent interest rate might have seemed appropriate to the central planners for Germany, in Greece, such a rate would have been wildly off the mark.
The perfect storm has now developed. After brewing for more than a decade, the economic consequences of central planning and central banking have finally become too obvious to ignore. And without real solutions, matters will only continue getting worse in the long run.
According to analysts and economists who predicted the financial turmoil plaguing the world in recent years, the answer to Europe’s crisis is not more bailouts, money printing, or fiscal “integration.” A global fiat currency managed by the IMF, the solution of choice being advanced in elite political circles, would be even more disastrous.
Instead of pursuing with increasing zeal the same policies that brought Europe to the brink — or worse, imposing them on the whole planet through a centralized world monetary system — it might be time to try a new approach. Abolishing the ECB and restoring honest money would be a great place to start. Limited government and freer markets wouldn’t hurt, either.