Bloomberg offers a nice summary of recent Euro-Zone friction in How the Strauss-Kahn Case Damages Europe
Strauss-Kahn’s departure from the scene couldn’t have come at a worse moment. Little noticed in the U.S., but momentous inside Europe, was Denmark’s unilateral decision on May 11 to check the papers of people arriving from other European nations. That’s the equivalent of New York asking for papers at the Lincoln Tunnel crossing from New Jersey, and appears to violate the 1985 Schengen Agreement, which removed border-crossing procedures among 25 European states.
German Interior Minister Hans-Peter Friedrich says that Denmark’s action could set off a “spiral of mistrust.”
Outside of a cosmopolitan few, Europeans’ loyalty is first to their town or nation, and only then to “Europe,” which, nearly two decades after the 1992 Maastricht Treaty, is still more of a landmass than an idea. Europe’s equivalents of the Tea Party are populist, nationalist parties like the True Finns and the Danish People’s Party, which resent Arab immigrants, the Eurocrats in Brussels, and members of the elites like Strauss-Kahn who are taking them places they don’t want to go. Finland’s demand for tough terms on Portugal’s bailout can be traced directly to the rise of the True Finns, who captured a fifth of the vote in April elections.
The backdrop for the intra-European tension is, of course, financial distress. It’s no longer fellow feeling that’s keeping aid flowing to Greece, Ireland, and Portugal; it’s fear. If those countries default on their sovereign debts, it will blow a hole in the banks that hold their loans and bonds. By the latest count of the Bank for International Settlements in Basel, Switzerland, foreign banks (mostly in Europe) held over $1 trillion worth of Spanish, Greek, Irish, and Portuguese debt at the end of 2010.
The latest idea, launched by Luxembourg Prime Minister Jean-Claude Juncker, is to give breathing room to debtors in a way that (it’s hoped) doesn’t qualify as a default that would force banks to take writedowns. It’s called “soft restructuring,” or even “re-profiling,” a European Commission mot du jour that belongs in the same linguistic category as “terminating with extreme prejudice” for murder.
Opposing the would-be re-profilers, European Central Bank officials are standing firm against any sort of restructuring. On May 18, Juergen Stark, a member of the bank’s executive board, said a restructuring of Greek debt “would create a catastrophe” by wiping out most or all of the capital of Greece’s own banks.
The friction between the nations that give and those that receive is only getting worse. Europe’s richer members don’t want to hand over, without strings, any more aid money; their populations won’t stand for it. “Greece will have to implement huge reforms. Greece will have to rapidly, rapidly privatize many public entities,” Juncker said on May 17. Only then, he said, would the EU consider further aid.
It doesn’t help that Germany, the biggest creditor on the continent, is thriving. The European Central Bank is torn between Germany’s need for higher interest rates to avoid inflation and the weaker countries’ need for super-low rates. The compromise is a key lending rate of 1.25 percent, vs. the zero to 0.25 percent range maintained by the Federal Reserve.
Strauss-Kahn, before his arrest, had been considered a favorite to succeed Nicolas Sarkozy as French President. As one of the EU’s true believers, he had demonstrated the leadership and persuasiveness needed to prod the European countries that expressed little more than a vague commitment to back up their pledges with cash. The tragedy of his downfall echoes far beyond an 11-by-13-foot jail cell at Rikers.
Spiral of Mistrust
Other than that last misguided paragraph, the Bloomberg article hits the nail on the head regarding friction, protectionism, and mistrust.
The question I have is simple: Why shouldn’t there be mistrust?
- The Euro-Zone setup was flawed from the beginning. A currency union with no fiscal union has never worked in history. Why should such a union work now?
- Greece should never have been admitted into the Euro-Zone in the first place. A trivial amount of research would have uncovered Goldman Sachs derivatives designed to hide Greek debt.
- Even if one failed to discover those derivatives, pension rules, retirement plans, and productivity were all wildly different between Greece and Germany. So why was Greece admitted other than to placate bureaucrats’ wet-dream of a unified Europe?
- Instead of admitting the mistake, ECB president Jean-Claude Trichet, against the advice of Axel Weber (then head of the German central bank), decided to put the ECB itself at risk by buying government bonds of Greece in a foolish attempt to drive out speculators, and drive down the yields on Greek debt.
- Trichet’s foolish move makes his face look like a scrambled egg, yet Trichet refuses to admit he has done anything wrong.
- Like a gambler down 90%, Trichet wants to double-down one more time, risking the solvency of the EU itself.
True Finns Rise a Result of Mistrust
Bear in mind all of these maneuvers by Jean-Claude Trichet, the IMF, and the Euro-Zone ministers are designed to bailout banks at the expense of taxpayers.
The True Finns party is one result.
I vehemently disagree with the True-Finns socialist agenda, but they rose to power for one simple and well-deserved reason. The True Finns see these bailout maneuvers for what they are: a violent raping of taxpayers for the benefit of the banks.
With that in mind, why shouldn’t there be mistrust?
The surprising thing is not the Euro-Zone mistrust; the surprising thing is there is not more mistrust. For further discussion, please see …
- Trichet Goes Ballistic, Walks Out of Meeting Over the Term “Soft Restructuring”; Infighting Over Who Replaces IMF Chief; Some Suggest Trichet
- ECB Ostrich Maneuver; Euro-Zone Comedy Show: Junker Proposed “Re-Profiling” Greek Debt, Now He Wants “Soft Restructuring”; Targeting Short-Selling
Norway, Iceland, Liechtenstein Suspend Greek Development Funds
New news is out today, this time from several countries which have had enough of Greece.
Bloomberg reports Norway Suspends $42 Million in EEA Greek Development Funds
Norway, Iceland and Liechtenstein froze payment of 235 million kroner ($42 million) in European Economic Area grants to Greece because the government didn’t meet the obligations linked to the funds.
“Greece had committed to paying 50 percent of each project. This was not followed up,” Norwegian Foreign Ministry said in a statement posted on its website yesterday. “It’s also unclear whether the money already transferred to the Greek authorities was forwarded to the appropriate recipients.”
About 13 million kroner of the committed funds for the period of 2004 to 2009 had been paid out, the ministry said.
Greece’s debt will balloon to 157.7 percent of gross domestic product in 2011 as the economy slumps for the third year, the European Commission forecast last week, fueling doubts whether the country will generate enough growth to pay its bills.
The amount is not significant, the attitude change is.
Finally, and in case you missed it, please see Spain’s Icelandic Revolt; Protests Spread to Italy. “Fed Up” sentiment as well as mistrust are spreading.
Mike “Mish” Shedlock
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