Eurozone Comes Back to Reality With a Crash

Renunciation of Greece’s debt by a new government?

By Don Quijones, Spain & Mexico, editor at WOLF STREET. His blog: Raging Bull-Shit.

Any lingering hopes that the euro crisis had been put to rest were brutally dashed yesterday. In the space of just a few hours on Tuesday, the Athens Stock Exchange plummeted 13% amid speculation that early Greek Presidential elections will spark renewed political turmoil. It was the largest one-day slide since December 1987; not even in 2010, when the country requested its first Troika bailout, did Greek stocks lose so much value in one day.

On Wednesday, with investors’ blood still congealing on the sidelines, the ASE slid a further 1% while yields on Greece’s benchmark ten-year bond surged back over 8%. So far on Thursday, the ASE plunged another 8%. Down 20% in three days.

The main reason for the rout: investors fear that the Greek parliament’s failure to approve a new president would trigger parliamentary elections in the nation, which returned to the bond market this year with great hoopla, after a record bailout. If elections are indeed brought forward, the anti-austerity party Syriza could well emerge the eventual victor, albeit as leader of a coalition of left-wing and centrist parties.

In the event of a Syriza victory, Greece would undertake an independent audit and restructuring of its public debt – at least that’s the plan! Given the scale and scope of corruption in the country – Greece is home to the EU’s most corrupt public sector, according to a European Commission study – who’s to say how much “odious debt” the independent auditors might find.

[“Odious debt” is a legal theory that holds that the national debt incurred by a regime for purposes that do not serve the best interests of the nation shouldn’t be enforceable. My post on this phenomenon… How Much of Our Debt Is “Odious”?].

Naturally, a massive renunciation of debt by a newly formed Greek government is unlikely to cheer investors – especially Greece’s main investor, the Troika. Hence the financial bloodbath. More worrisome still is the fact that Greece, whose economy represents just 1.5% of total EU GDP, continues to pose a threat to the economic stability of the world’s largest market, despite having received the world’s largest ever rescue package.

However, it’s not just political developments in Greece that are the problem. Across Europe, political instability is spreading like wildfire, from its Mediterranean periphery to its Teutonic core.

In Spain, the euro zone’s fourth largest economy, the two incumbent parties, the PSOE and PP, are bleeding support to Pablo Iglesias’ anti-austerity party Podemos. Like Greece, Spain is supposed to be one of Europe’s rare success stories of 2014, with expected GDP growth of over 1%. However, try telling that to most Spaniards, who, like most Greeks, have grown bone-weary of a daily diet of Troika-imposed austerity, depression-level unemployment, and an endemic culture of political corruption and impunity, while being told that everything’s on the up.

Like Syriza, Podemos proposes a thorough independent audit of the national debt. It also advocates the right to a basic income, a cap on executive salaries, increased transparency of political party funding, more stringent restrictions on political lobbying, stronger government support for SMEs and R&D-intensive industries, the creation of a national bank for investment, and the re-nationalization of strategic sectors such as telecommunications, utilities and the country’s formerly public-owned savings banks [full manifesto in Spanish].

Given the scale of betrayal of Spain’s main two political parties it’s hardly surprising that voters are looking elsewhere for inspiration – even if Podemos’ pledges are completely impracticable for a country trapped in a vast monetary union. Put simply, voters have had enough of the status quo. And not just in Spain and Greece but across the old continent.

In France it is the radical right that is in ascendance, as Marine Le Pen’s National Front continues to attract disaffected voters with a dizzying cocktail of pledges, from the scrapping of the euro to greater state control of banks and an end to Europe’s Common Agricultural Policy. According to recent polls, Le Pen would humiliate Holland in a head-to-head vote. Indeed, so afraid is Brussels of Le Pen’s election prospects that it has forestalled any actions against France’s continued flouting of the EU’s budget rules.

On Europe’s northern periphery, Sweden’s center left government is teetering on the brink of collapse just two months into office after a far-right party announced it would vote against the 2015 budget. Even in Germany, the Eurozone’s sugar-daddy economy, the political landscape is shifting, as Ambrose Evans Pritchard reports:

The rise of the eurosceptic Alternative für Deutschland (AfD) has become a credit headache for the whole Eurozone, forcing Chancellor Angela Merkel to take a tougher line in European politics and risking an entirely new phase of the crisis. “Until recently, no openly eurosceptic party in Germany has been able to galvanize opponents of European ‘bail-outs’. But this comfortable position now appears to have come to an end,” it said.

And so the slow disintegration of European political consensus continues unabated. This is not just about the rise of so-called populist parties in Europe; it is about the emergence of a massive split in how the people of two different regions of Europe perceive the continent’s future. In the South a new generation of political parties is enticing disaffected voters with the impossible dream of a new, austerity-free reality, while those who are meant to pay for it – i.e. those in the Center and North – are fast losing interest in funding the European project altogether. By Don Quijones.

In Europe, extreme wealth is not just subject to virtually no tax; it is a magnet for public funds. Read…  The Smiling Face of Austerity: More Welfare for Rich Landowners in the EU

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  2 comments for “Eurozone Comes Back to Reality With a Crash

  1. Paulo
    Dec 11, 2014 at 8:01 am

    Good for the aspiring new leaders of Spain and Greece!! What should they do, wait for the European Union to finish sucking the life out of them and then let the IMF take over for any husk that might be left?

    The European Union was poorly thought out with no ‘system’ for fixing or addressing economic decline. In the rush for ever bigger trading blocks based on cheap energy and the surge of globalization, the heady foray into the Union had some unforseen consequences for all.

    The responsibility of leadership is how best to look after their citizens. Clearly, massive unemployment and a lost generation is not the way to go. Unaddressed, the disaffected will rise up and make the current idea of leaving the Union look like church social.

    regards….Paulo

  2. retired
    Dec 11, 2014 at 4:28 pm

    The problem is that we keep dancing around the real facts & analyze minor considerations.The people who write the political opinions give very little,if any,consideration to the financial & economic factors which are outside of their narrative.They do this & pretend that global economic problems are a minor footnote to our current international crisis.
    Sadly,the financial pundits do the exact same thing in reverse,they assume that politics is of no great importance!
    I believe that without combining both politics,economics & finance we will never discover the truth!
    A)The establishment elites are in a trap produced by adherence to the reserve banking system & it’s debt based economy.The only way out is default which is another name for deflation & massive economic corrections .There is not enough wealth in the whole world to pay all of the leveraged debt.
    B)This deal that they call Austerity is really an attempt to pay the debt with wealth drawn out of the middle classes. If allowed,this would bankrupt the middle classes.If this were to happen there would be revolution & civil war across much of the world as people in the middle react to their new impoverishment!
    B2)The middle classes also happen to comprise the great majority of consumers in the consumer based Global economy.If the establishment destroys it’s customer base,who will they sell their products to in order to avoid bankruptcy?
    C)Racial & ethnic hatreds would blow up,Europe would become a slaughter house with different groups at war with each other!
    D)3RD world nations,which are already living from day to day,will become Failed States.
    E) Economically broke,many nations will revert to their old habits.They will wage war on their neighbors!
    E) As has been said in the past,since the beginnings of the welfare states in Europe & America there has been a compact between the Elites & the proletariat.The workers would get their percs. & entitlements & would in turn refrain from burning down the country.In Effect,the middle class workers have become Entitlement Addicts,kept sedated by Bread & Circuses.The bread is quickly disappearing but the circus goes on!
    When the economy craps out,the welfare state will tank with it. The Welfare Junkies will start going crazy!

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