It didn’t take all that long. In November 2011, Alexander Stubb, then Finnish Minister for European Affairs and Foreign Trade, added his morsels of wisdom to the Eurozone debt crisis that was blooming into splendid fruition.
“It should be the triple-A countries” – at the time Finland, Germany, France, Austria, the Netherlands, and Luxembourg – “that basically, not dictate the rules, but at least have a strong say, because why would we listen to countries that are not taking care of their own public finances?” he told Reuters.
With a PhD in International Relations from the London School of Economics and Political Science, he knew whereof he spoke.
“For me, the euro is a Darwinist system. It is the survival of the fittest. The markets take care of that, and I think that’s the best way we can keep up market pressure.”
Political pressures and the force of the financial markets would elbow these non-triple-A debt-sinners countries – 11 of them at the time – into cutting their deficits and eventually, someday, their debts, as prescribed by treaty, or they’d force them out of the Eurozone.
Europe’s “real core” is made up of those countries that use the euro and are triple-A rated, he said. They have a better economic management reputation than the rest. So, instead of some political core, “it’s a market driven core.” And those countries that couldn’t make it to a triple-A rating, well, the Eurozone might need to be a lot smaller….
In the summer of 2012, Uncle Draghi’s “whatever it takes” washed over these markets.
In June 2014, Stubb became Prime Minister.
And today, Standard & Poor’s cut Finland’s triple-A rating to AA+, same as many other debt sinners in the Eurozone. Only Germany and Luxembourg remain in that triple-A rated core of Europe that Stubb had so wisely described three years ago.
Finland’s economy will likely shrink in 2014 for the third year in a row, dependent as it is on its disappearing mobile phone industry (Nokia) and the paper industry. And now, the Ukrainian fiasco is causing a lot of unhelpful friction with neighbor Russia. Or as S&P put it:
The downgrade reflects our view of the risk that the Finnish economy could experience protracted stagnation because of its aging population and shrinking workforce, weakening external demand, loss of global market share in the key information technology sector, structural retrenchment of the important forestry sector, and relatively rigid labor market.
Maybe the Troika should impose the same “structural reforms” on Finland that have helped Greece so much?
But Stubb doesn’t need to worry that this vicious downgrade would raise Finland’s cost of borrowing. Just look at Japan. It is in the worst fiscal situation of any still functional country, with the worst deficit (for years, the government has borrowed around 50% of every dime it spends) and the biggest mountain of debt of any country out there, and much, much worse than the worst in the Eurozone, which is Greece.
S&P reaffirmed Japan’s AA- rating – three steps down from AAA – in February 2013 shortly after Abenomics became the economic religion that everyone in the media instantly believed in, though the Japanese, who are a bit cynical about their politicians, were less convinced. S&P too believed in Abenomics: “We believe the measures adopted by the new Shinzo Abe administration at the beginning of its term will be critical if it is to arrest what we see as a prolonged decline in Japan’s sovereign credit standing.”
In October 2013, S&P re-reaffirmed, pointing at Japan’s strong external position, rich and diversified economy, improved political stability, and a financial system that hasn’t collapsed yet, weighed against the treacherous fiscal position, aging and declining population, and of course, the bogeyman of over-indebted societies, deflation. AA-? I mean, come on. Have the folks at Standard & Poor’s already been replaced by bots?
But look how much Japan’s government pays to borrow – from the Bank of Japan, these days – for 10 years: 0.50% … the lowest in the world! That’s the state of the credit markets today.
So Finland’s newish Prime Minister doesn’t need to worry. His dream that credit markets would force countries to do the right thing and cut their deficits and get their house in order was a pipe dream.
His dream that the “market driven core,” the Eurozone’s “real core” consisting only of triple-A countries – Germany and Luxembourg – could “basically, not dictate the rules, but at least have a strong say” and elbow all others into line, or out of the Eurozone… this dream of his that the euro is “a Darwinist system” where “the survival of the fittest” reigns… all these noble concepts from three years ago when everyone was hammering on Greece, well, they were elegantly wiped off the face of the Eurozone with Uncle Draghi’s promise to do “whatever it takes” to force down yields to near zero even for the worst debt sinners. That promise was his effort to keep the Eurozone duct-taped together. A promise that the credit market has no apparent interest in testing – in part because that credit market, thanks to that very promise, is no longer a market.
Stubb, however, couldn’t respond in any official manner to this downgrade debacle; he was busy eating his words.
In Germany, economic comparisons to the terrible year of 2009 are suddenly cropping up with unnerving regularity. And stocks have already rolled over. Read…. “There’s no Reason to Panic” about German Miracle Economy
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I still don’t understand how someone borrows money from someone that doesn’t have it and then digitizes it, owes that person interest on something that doesn’t exist. I know the borrower used this fake money in the real world? But why are they allowed to do this in the first place? As far as I can tell the Central Banks are just a facade, designed to rape the people of their wealth. I posted this question a couple of years ago on Zero Hedge and got 60 or so up votes, but no answer.
Mark, here is a short and hilarious video by two Australian comedians, Clarke & Dawe, that wonderfully explains the whole idiocy of over-indebted countries borrowing even more money to bail out countries that have borrowed too much money in order to keep the whole system alive. This one is on the euro debt crisis, but the principle is the same everywhere.
Thanks for publicising our two great Aussie comedians/political commentators, Wolf! If ever the world starts taking notice of them, they should get a Nobel Prize!
I love these guys!
Institution, which borrows takes a risk that it wont get paid back. When they dont get paid back, they have to make that money from somewhere else. Banks do need to lend money from central bank, if they dont have enough deposits. When they give a loan, they dont have that money – thats true. Just digits on their computer.
How Central Banks rape your wealth if i can ask? Inflation at the moment is 0.3 percent in euroarea.
Central banks have possibility to keep economy running, like China did back in 2008, they started to stimulate like grazy and its going pretty well over there. Slowing down now, but still… Great depression thought us, why you cant just hope, that economy will start going on its own after a crash. Government must put wheels running and best way to do this is by central bank. You just print money give it for government and cities and they buy for citizens what citizens want. There has been only 1 problem so far. Governments and cities wont often give citizens what they want.
“How Central Banks rape your wealth if i can ask?” It’s a reference to 17 trillion in debt that will never be repaid and how many hundreds of trillions in unfunded liabilities? Eventually this is going to reach a crossover point and all Americans will pay the price.
Theres not really any better solutions out there… If there is, I would like to here about it.
Government wants to build a White House for their citizens.
In gold currency:
Oh s¤%t, we have 30 % unemployment rate, all the materials for the building are in the shops, but we dont have any gold. Got to loan it from private miners and pay interest for them. Maybe we just dont build white house then, thats another solution. We would have work force and materials for it, but not enough gold.
In Fiat money:
Government creates some bonds and gives them for central bank, which gives 1 000 000 000 for government against these bond and government can build a white house with this money, which will create jobs for many fellas. These fellas can spend their pay checks and create more jobs. Unemployment will soon be under 10 percent. Thats wicked!
Who lost in this fiat-money situation, if I may ask?
All money is debt, if government would start to run surplus, private sector would need to go deeper in debt. That would for sure lead in depression, cause there would be less money to spend in purchases and more money would go to interest payments.
Sector financial balances in US:
Sector financial balances in Finland and Euroarea:
“I still don’t understand how someone borrows money from someone that doesn’t have it and then digitizes it, owes that person interest on something that doesn’t exist … “
The alternative is for people (someone) to borrow money that does exist. Soon enough there would be a shortage of funds to borrow = there would also be no industry! There would also be far fewer tycoons … as these borrow the bulk of the funds. Shortage of funds = unseemly ‘Battle of Tycoon vs. Tycoon’! We can’t have that!
I know the borrower use(s) this fake money in the real world? But why are they allowed to do this in the first place?”
There is no choice. Industrial enterprises cannot offer an organic return! That this is so is self-evident: if ANY firm could pay its own way it would do so … there would be no debts, everyone on the planet would be made rich by way of this one firm. Instead, industry is subject to the physical laws of thermodynamics, which does not allow the (capitalistic) free lunch that we humans love so much.
Because firms cannot earn, they must borrow instead. The borrowed funds are ‘fake earnings’ or ‘fake returns’ … substitutes for the real thing.
The outcome is economy saddled with hundreds of trillion$ of non-retireable debt: when this debt cannot be SERVICED by borrowing = Minsky Moment.
“As far as I can tell the Central Banks are just a facade, designed to rape the people of their wealth … “
People don’t have wealth, they possess claims against purchasing power which itself is (the fundamental) non-capital claim on capital … Capital is non-renewable natural resources, the basis of all human endearvors. OUCH! Here is another one of those pesky ‘physical laws’ messing with our fun! When we run out of resources = we run out of purchasing power, despite boatloads of ‘wealth’.
Central banks can push on (already repressed) interest rates and can bail out their crooked banker friends. Otherwise, they are irrelevant. What matters is the price of money (claim against purchasing power) … as determined by millions of motorists around the world buying gasoline every day (and burning it up for nothing).
Burning up of the gasoline and other resources for nothing … using borrowed claims as the instruments of destructive waste … is why the world is bankrupt. The problem is at the end of your driveway …
… “using borrowed claims as the instruments of destructive waste … is why the world is bankrupt. The problem is at your Central Bank …”
There! Fixed it for ya!
Thanks to all of the above, I appreciate all of your input.
Mark, you got up votes but no answers on Zero Hedge because they thought it was a rhetorical question. It doesnt make sense to you because it shouldn’t.
Stubb is EU-fanatic. Everything to do with EU is fantastic and super. He doesn’t know a sh#t about finances, fiscal policies or monetary policies. All these things are just wonderful. When storm started from United States in 2008 Stubbs predecessor as prime minister Jyrki Katainen said that this mess will not touch us. Well, finnish economy is now 6 % smaller than what it was before 2008 crisis, so I’m glad that storm didnt enter in Finland.
Greatest irony in all of this is, that Jyrki Katainen, ex PM of Finland is going to be vice-president in EU comission and his responsible will be jobs, growth, investment and competitiveness.
Finnish jobs are going down, our economy is shrinking, investment aint really working either and only solution to competitiveness, what I have heard from this little Napoleon is, that we gotta cut wages. This whole thing is pretty damn hilarious, if you ask from me.
I havent read Darwin, but Galbraith said that prominent classical liberal political theorist of the Victorian era called Herbert Spencer invented expression called Survival of the fittest.
EU needs huge Marshall Plan\New Deal 2.0 and common fiscal policies, if it wants to avoid disintegration. Beggar thy neighbor-policy will destroy us all.
Keynesian stupidity is a problem for Finland and Europe, not a solution. It won’t work in Japan, it won’t work in the old continent.
We have been going in to debt for six years, public sector has used money like lunatic and the result is that industry is gone, taxation level as high as in France, and real (not statistical) unemployment is something around 15-25 %. No more inefficient public spending and corruption for me thank you!
How you know, that Keynesian doesnt work? I can tell, that unemployment without Keynesian “stupidity” would be 30 % in Finland also. Theres nothing Keynesian in austerity and thats have been motto for Europe last 6 years. Keynesian havent been the problem, I would say. Euro, not integrated fiscal policy (tax havens, race to the bottom…) and austerity have been
Finland is too small to run whole worlds economy, Keynesian doesnt work in global world, if only few countries does it and others stretch their belts.
Biggest problem for Finland are wages, which grew too high in 2008 and we couldnt devalue “our” currency, cause we are in euro. Sweden devalued immediately at the beginning of crisis and they are doing pretty fine. Of course Sweden have few other advantages, but still…
Lower taxation and higher government spending would for sure put economy growing, but as I said, Finland cant do it for ever alone or we will end up like Greece.
Greeces thing aint working either. Less government spending have put gdp to downside spin and debt to gdp is going up, because of this. less earnings for citizens means less tax revenues for government and its hard to pay interest if you aint have any revenues.
and up we go… http://fi.tradingeconomics.com/greece/government-debt-to-gdp
It doesnt really matter how much you spend, if you spend it in your own currency. Problems will come when you take loans in foreign currencies, like our banks did at early 90s, when we had bank crisis, because of ECU, which was predecessor of euro and it was a disaster, overvalued Mark smashed us.
Keynesian worked pretty damn well from 1950s to 1980s, before monetarism and problem might be also how you use Keynesian and where do you spend. If you Japan buys missiles from United States, it aint gonna do much good for Japan. Japans debt is mostly in their own currency, so it wont be such a big problem.
I’m ready for deflation; in fact I’m looking forward to it. (naturally I’ve hedged my bet for the eventuality that we will get inflation when central banks over-react and crank up the printing presses)
eurozone smashed the market this week. Could be more down, but have a look at the TICK reading so far here ==> http://bit.ly/1fMcakI normally when the tick reading gets down this low you will see a solidy 1-2 day bounce, that can make you alot of money short term, / swing trading.
To me this downside is just another opporutnity for the smart money guys to TRICK all THE BEARS in again. Soon the bears will wish they were never born!!!, yes. That old chest nut. :-)