Waiting for the Inevitable

Another Grandiose Utopian Project To Follow the Dodo

Ho hum.  Another day.  Another crisis meeting in Europe.  We predict after this weekend's meeting communiques will be issued and declarations made to the effect that "important steps" have been taken.  The crisis can now abate.  It will last twenty-four hours, then the crisis will return, with a vengeance.

Euro-politicians are living in denial.  They cannot bring themselves to face the inevitable and brutal truth.  The euro project is finished.  It is over.  It has to be broken apart.  You can do this in a relatively orderly fashion, once the pollies bow to reality, or it can break apart by itself.  Either way it is going.  Jeff Randall, writing in the Financial Times and the Sydney Morning Herald explains why the euro has to fail:

At the heart of the disaster is the reluctance of Europe’s self-deluding elite to admit that the single currency was launched on a false premise and shored up by deceit. As long as its members insist that there can be a politically contrived solution to what is essentially a financial crisis, the cost of failure will continue to soar.

The false premise was, as the high-priest of liberal-Left economics, Princeton’s Paul Krugman, pointed out recently, ‘‘the arrogance of European officials, mostly from richer countries, who convinced themselves that they could make a single currency work without a single government’’. (Emphasis, ours)

The deceit, highlighted by Harvard historian Niall Ferguson in the first of his Reith lectures last week, continues to be a ‘‘fraudulent’’ system of national accounting, allowing huge liabilities to be hidden by profligate states: ‘‘Not even the current income and expenditure statements can be relied upon in some countries.’’

Confounded by events and discredited by outcomes, those who urged us to believe that political firepower would abolish financial gravity inside the eurozone are now tormented by their own hubris. Yet rather than confess to intellectual shortcomings, they thrash about for scapegoats.

One crackpot theory suggests that it’s all the fault of the Germans for having the cheek to work hard, pay taxes, save money and be competitive. If only they were more like their unproductive, big-spending trading partners, all would be well.  Another blames the evil of ‘‘speculation’’. This Anglo-Saxon barbarity, it is claimed, must be rooted out so that near-bankrupt EU countries can once again borrow on terms normally reserved for AAA-rated customers.

This is nonsense. The problem is not those benefiting from the system but the system itself. In a league table of financial fantasies, the euro is right up there with Tulipomania and the South Sea Bubble.  Encouraging soft economies to operate with a hard currency is the devil’s work. It ends in financial purgatory.

There is, however, one important difference between where Greece is today and Hell: unlike the eternally damned, the Greeks do not have to suffer in perpetuity. They have an alternative; it would not be pain-free, but it offers an escape from diabolical austerity and a chance to rebuild.

Greece must default and leave the euro. Writing in Le Monde diplomatique, Costas Lapavitsas, professor of economics at London University’s SOAS, explains: ‘‘Greece needs to stop chasing its tail by seeking to service an unsupportable debt... default ought to be followed by the reintroduction of the drachma.’’ Yes, there would be short-term economic turmoil, but it has to be better than endless suffering.

Formal bankruptcy is the financial solution to a financial problem: Greece’s insolvency. Will it happen? Not if self-serving EU leaders and their Brussels flunkies have anything to do with it. Like members of the Flat Earth Society, they cling desperately to a vision of the world that no longer bears scrutiny.

The dream of a United States of Europe has turned into a nightmare, but confronting reality is too terrifying for them to contemplate. In the absence of voter approval for irreversible fiscal union and a perpetual conveyor belt of taxpayer funding from Stuttgart to Salonika, how does the euro survive?

Our expectation is that the longer term realism of financial markets will eventually put the euro to the sword.  The Euro politicians have far too much personal capital invested in the deeply flawed project to do the necessary deed. Turkeys don't vote for an early Christmas.  The two dominant players, Germany and France will continue to cling to the euro-project each for their own mutually exclusive interests: to gain hegemony over the other and over Europe as a whole.  With the eurocrats and Germany and France unable to cut the euro off life support, the capital markets will have to do the deed.  And they will.  Eventually.   

Europe will face a deep and sharp depression.  Then its respective economies will pick up, rebuild, and move on--some quicker than others, obviously.  Another grandiose utopian project will have hit the wall.