<#315 Spotlight>
The End of the EURO? What a Non-sense!
By Lee Chai-on, Professor, School of Economics
The so-called ‘euro collapse’ scenario is based on the assumption that rich European countries abhor any sacrifice of their tax payers for the public debts of poor European countries. This assumption has been fabricated by the Anglo-Saxon media to divert world attention from US and UK financial crashes to European affairs. Yet the scenario is unfounded because the Europeans are more and more integrating only to deal with the public debts of member countries in exchange for the political gains of one part on the other part.
The New York Times (http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html) has posted in last November a very informative game called "You solve the budget problem" on its website which allows each player to try and restore the state of federal public finances according to its socio-economic priorities and policies. Feel free to put yourself in the shoes of a Washington decision maker in and you will see that only political will is lacking to solve the problem. According to Wikileaks, even Mervyn King, head of the Bank of England, believes in an accelerated integration in the Eurozone as a result of the crisis, which recounts his conversations with US diplomats (source: Telegraph, 12/06/2010).
The US municipal bond market intended to fund the local transportation, health, education and sanitation infrastructure (It’s worth nearly 2,800 billion USD) offered a foretaste of upcoming major crash to us with a mini-crash in November 2010 that made all the year’s gains go up in smoke in a few days. The mini-crash, however, was surprisingly covered up by the "silence" of the major financial media on the issue. It was because the Anglo-Saxon media machine had succeeded in focusing world attention on a further episode of the fantasy sitcom "The end of the Euro, or the financial remake of Swine fever". In comparison, no investor has lost money in the "Greek and Irish episodes" of the "Euro crisis", whilst tens of thousands have lost considerable sums in the US Muni crash... yet the media covers the first and not the second. Just as the Swine fever crisis ended in a masquerade with governments stuck with colossal stockpiles of now worthless vaccines and masks, the so-called Euro crisis is going to end up with players who will have to redeem their so “profitable” bonds for next to nothing whilst their dollars will continue to fall in value.
The United States funds its deficits by a huge daily grab of available global savings. The country’s diplomatic credibility and effectiveness are therefore two essential features for its financial survival. But Wikileaks’ recent revelations are very damaging to the credibility of the State Department, whilst the recent complete failure of the new Israeli-Palestinian negotiations illustrates a growing ineffectiveness of US diplomacy, already very sensitive at the last G20 in Seoul. In view of this, the progression of the terminal crash of Western public debt (in particular US and European debt) is beyond doubt for four reasons:
- the absence of economic recovery in the United States which strangles all public bodies (including the federal state) accustomed to an easy flow of debt and significant tax revenues in recent decades.
- the accelerated structural weakening of the United States in monetary, financial as well as diplomatic affairs which reduces their ability to attract world savings.
- the global drying up of sources of cheap finance, which precipitates the crisis of excessive debt in Europe’s peripheral countries (in Euroland like Greece, Ireland, Portugal, Spain, ... and the United Kingdom as well Iceland and Ireland, etc.) and is starting to touch key countries (USA, Germany, Japan) in a context of very large European debt refinancing in 2011
- the transformation of Euroland into a new "sovereign" that gradually develops new rules for the continent’s public debts.
It is from late 2011 (at the latest) that the merits of this debate will begin to be unveiled within the framework of the preparation for the permanent European Financial Stabilisation Fund. The rise in strength of the political renewals expected in France from Spring 2012 by dint of this, and perhaps also in Germany at that time, will make these issues real campaign topics from the end of Summer 2011. Although, what will suddenly appear for the majority of investors who currently speculate on the exorbitant rates of Greek, Irish,... debt is that Euroland solidarity will not extend to them, especially when the case of Spain, Italy or Belgium will start being posed, whatever European leaders say today. Angela Merkel (and other Euroland leaders as well) has every intention of making investors pay for significant share of their Irish and Greek bets. But that will happen in an organized manner, as an effective and forceful strategy which the strong States are used to; not in a panic, in the context of a mini-crisis.