A Cacophony Of Discord, Default, And Visions Of Impossibility

The Eurozone wasn’t supposed to be a house of cards. And as long as there was “confidence” that it would work, it worked: the financial markets offered cheap no-questions-asked loans to the most profligate governments, and even tiny countries like Cyprus were able to suck up and disperse in record time phenomenal amounts of money. The elites got immensely rich, and even other members of society were able to pick up some crumbs. But all that remains from this drunken frenzy are mountains of decomposing debt—and a cacophony of discord, shouting matches about defaults, and visions of impossibility. Former taboos are violated, sacred cows are slaughtered, and the euro has been tossed on the chopping block.

There was billionaire Frank Stronach who’d announced he’d start an anti-euro political party in Austria. While the European Union should guarantee peace and the free movement of goods, people, services, and capital, he said, it could only function “if every country has its own currency.” He called the ESM, the not yet existing bailout fund that is supposed to save the Eurozone but is still hung up in the German Constitutional Court, “insolvency procrastination.” And he exhorted Austrians to ditch the euro.

Austrian Foreign Minister Michael Spindelegger (ÖVP) would take the opposite tack. Worried about exports—half the jobs in Austria depended on them—he’d rather not get rid of the euro. Instead, “We need possibilities to kick someone out of the monetary union,” he said, particularly “countries that don’t stick to their commitments.” And he jabbed at Greece because it had lied about its numbers in order to be allowed into the Eurozone.

Alas, being able to kick a country out would require treaty changes, which would take five years, Spindelegger said. But he’d already started discussions with other foreign ministers. While many of them supported treaty changes, unanimity of all 27 EU countries would be required, he said, possibly aware of his illusions.

He immediately caught heat from stalwarts in the coalition government. Some called it “populist”—as opposed to elitist, perhaps. Chancellor Werner Faymann was worried about “the negative consequences of a breakup of the Eurozone”—even he used breakup of the Eurozone, a concept now as common as the currency itself, though for top politicians, it had been an unmentionable not long ago. And in Germany, the discussion had already come to a boil.

In Finland, Foreign Minister Erkki Tuomioja poured gasoline on the fire: “We have to face openly the possibility of a euro-break up,” he said. “Our officials, like everybody else, and like every general staff, have some sort of operational plan for any eventuality.” The only handicap? “A Eurozone break-up would cost more in the short-run or medium-run than managing the crisis.” So it was just a matter of when to recognize the costs incurred in prior years: publicizing them now or sweeping them under the rug via the bailout funds that Stronach had correctly called “insolvency procrastination.”

Like Stronach, Tuomioja wanted to preserve the EU, and dumping the euro would make it “function better,” he said. He confirmed the scenario that either the south or the north would escape “because this currency straitjacket is causing misery for millions and destroying Europe’s future.” It didn’t help that he called the euro “a total catastrophe.”

Not a day passes by when the concept of a Eurozone breakup doesn’t flare up in public. Each time, it saps confidence in the euro even more, though “confidence” is the only thing that separates that house of cards from collapse. The 21 EU summits to save the Eurozone, the waves of half-hearted dog-and-pony shows, and the alphabet soup of tangled-up and ineffectual bailout measures have all failed to stem the slide. There is nothing to indicate that a magic potion could eventually be found. And the fact that “breakup of the Eurozone” is such a common topic at the top of the political power structure has infused it with a life of its own.

“Default is not necessarily destructive,” said Panayiotis Lafazanis, a Greek politician. For the Greeks. But highly destructive for the European Central Bank that ended up with the Greek bonds, and for banks with derivative exposure to them. Hence the bailouts. To keep them afloat, not the Greeks.

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  5 comments for “A Cacophony Of Discord, Default, And Visions Of Impossibility

  1. Juno
    Aug 20, 2012 at 4:35 am

    Perhaps the Eurozone is a house of cards, rightly – as you said – held together more by confidence than by structured stress bearing ground rules. And the house of cards is inflexible, which fundamental defect is not addressed as yet, so that the weak Eurozone nations have no chance of using currency revaluation to regain economic advantage.

    And like a house of cards, even the smallest change or shift can bring total collapse. Nobody is breathing on it now.

  2. Wolf Richter
    Aug 20, 2012 at 4:59 am

    Juno – The Eurozone is holding its breath (to avoid blowing down the house of cards), that should be the title of my next Eurozone post

  3. kmt
    Aug 20, 2012 at 12:24 pm

    My bet is on a breakup between the north and south (of Europe); the creditors and the debtors. Creditors takes a hair cut on the bond side and are paid in devalued currency (south euro); the debtors wages and benefits readjust downward and bring about forced austerity, and; the two new euro zones are at last free to adjust monetary policy as needed. The major benefit is that the EU remains in tact, with two currency pegs, debts are paid, and, each block is more stable (in theory) than individual countries-ultimately allowing the the southern block to "work" its' way back toward monetary union with the north, if they decide to.
    This is the main chance, the only chance really. I've got $10,0000, wanna bet?
    KMT

  4. Juno
    Aug 20, 2012 at 9:11 pm

    Nice thought, a two segment Euro, changes the problem, but is not a solution.

    Back to definitions
    a. what is south, do you see a common currency for Greece, Cyprus, Ireland, Spain, Portugal and Italy ? Who will lend any currency to that group at viable interest rates ?
    b. what are these currencies pegged to – each other, or to the USD, the GBP, or simply the SDR ? To my thinking a pegged curreny is a tied currency, so there is not the freedom for economic adjustment that you envisage.

    Change your USD to Gold, and maybe your bet would interest someone. I grow potatoes, something that is tradeable in times of feasting or famine.

  5. kmt
    Aug 21, 2012 at 10:35 am

    Assume that the association among the southern euro countries is voluntary, i.e., they are free to join or not, without any financial means of their own it becomes a Hobson's choice. They will either hang together or hang individually. Their only recourse for borrowing will be, at least at first, from those who they've always borrowed from, the north, and at relatively high rates too. They will no doubt be punished and suffer for a while, but is that any different than today? If they print too much money to pay bills in overly depreciated currency, they will be punished. If they spend to freely, they will be punished. If they harrumph about their "National Pride" being hurt, they will be punished.
    The whole point of the north/south division lies in regaining some measure of competitive balance for all. The north will lend because not doing so will only makes matters worse for the whole of Europe. The south will be forced to reform its' systems of politics, labor, banking and public welfare-the withering blasts of corruption will have to be dialed way down, Woohoo!
    I won't even try an put pearls on a pig. The south euro will be a very weak currency no matter it's peg (so long as it's members employ Fabians to delay the necessary reforms). But there lies the silver lining. If the leaders can't, don't or won't get their houses in order and do the things necessary to survive and prosper then southern Europe will be just another failed region. Contemplating this should concentrate every mind.

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