The great opportunity of the global economic crisis: getting rid of states
Would it not be proof of political maturity to accept that since the establishment of the single currency, the countries concerned have fared worse on all fronts than others: economic growth, unemployment, debt? , purchasing power? Today, 5 European countries are in unprecedented financial turmoil, and these countries belong to the euro zone: Greece of course, but also Portugal, Italy, Spain and Ireland. This is not a coincidence: the euro acts as a constraint by preventing these countries from playing on the monetary variable to get by and breathe a little. The strong euro is asphyxiating them, as it is asphyxiating us, and the currency can no longer play its role of natural adjustment in times of crisis, it is the unemployment rate which assumes this function. (…) Hence these ideas which are flourishing today, more and more eccentric, and disconnected from reality, such as that of putting normally democratic and sovereign countries under supervision (…). On a smaller scale, when everything was going from worse to worse, several European countries were ultimately able to leave the European Monetary System at the beginning of the 1990s. These countries, such as Italy and the United Kingdom, were strongly criticized at the time. for this choice, had ultimately fared better in the crisis, and had suffered less from the surge in unemployment. Having come out of their dogmatic fever, economists would end up admitting it a few years later. We must hope that the same thing happens with the euro. We must of course consider putting an end to the single currency, without taboos, and these countries, the first to be hit so hard, must lead the way. In the current ideological context, this requires a lot of courage, and a little tactics. In this regard, a grouped exit from the euro zone, which would see these 5 countries announce their desire to regain their monetary freedom on the same day, would make it possible to avoid too strong a stigmatizing effect, and would even most certainly push the markets to “finish work”, by playing the end of a euro which would have proven that it is not viable (Marianne2, 16/12/2009)
(continued) 14. The explosion of the State deficit
In many countries, the transfer of the burden of private debt to the public sector has caused deficits in government and social accounts to explode. The failures of governments which can no longer carry the debt are increasing. According to the level of CDS (Credit Default Swap), Iceland is considered bankrupt, Greece is very close to it (as the events of December 2009 showed). The risk premium for Greek loans is higher than that of UBS, one of the global dunces of the American real estate bubble. The risk premiums imposed on other States (Italy, Spain, Portugal, Ireland) simply suggest that they are likely to go bankrupt. To restore confidence, Ireland, particularly hit by the real estate crisis, granted its guarantee to all savings deposited in the island’s banks. A promise that goes well beyond his means. Before the crisis, Greece and Italy already had a debt that was far too heavy compared to the size of their economy. As a result, these countries no longer have any budgetary room for maneuver. Especially since their tax revenues are expected to melt away in the drought of the recession. In the near term, the finances of the British or French states could be threatened.
Real estate bubbles have burst or are on the verge of bursting in several countries. And simultaneously, the debt bubbles of many states are approaching rupture. The Dubai World affair of December 2009, named after the public Emirati conglomerate in default, is undoubtedly a harbinger of other sovereign failures. Within the euro zone, there are four southern countries whose solvency is worrying: Portugal, Italy, Greece and Spain. Some, contemptuously, called them “Club Med” countries, others gave them an acronym (PIGS) as unsympathetic as their finances are profligate. In Greece, where deficits accumulate year after year, the public debt reaches 113% of gross domestic product while the Maastricht criteria set the maximum authorized at 60%, and the deficit exceeds 12% in 2009 and 2010! The “draconian” measures he has committed to taking could include a reformatting of an overly generous pension system, tax increases, cuts in state spending, a fight against the economy submerged, etc. A radical austerity cure to regain credit. And a austerity plan from which other States will not escape which, too, too easily resort to debt to finance their lifestyle.
In the United States, President Obama is fighting the enemy with weapons from another time: printing money, the collateral effects of which place the United States closer every day to the threat of default! US public deficits, which are expected to be around $9,000 billion over the next ten years, effectively no longer authorize any substantial new raising of capital on the part of the American state, whose taxing capacity has also reached its point. optimal due to the economic crisis…Studies having demonstrated that all American and foreign investors having to increase their investments in US Treasury Bonds by 200% in order to meet the capital needs of the American federal state leave indeed perplexed by the solvency of the United States of America… which can no longer count on their own taxpayers who would thus have to pay a tax increased by 61% if their wish was to balance the budget of their country! California, the 8th largest economic power in the world, is in a situation of virtual bankruptcy. Its governor is threatening to cut social assistance programs if he does not obtain $8 billion in aid from the federal government. Nearly 40 American states could be unable to finance unemployment insurance within two years and would need 90 billion in loans to be able to continue financing it.
15. The questionable reliability of States
Contrary to what investors in general think, States are not reliable debtors. They are in fact judge and party, and no one could force them, including before their own courts, to repay their debt in full. They would have all the power, when the time comes, to pronounce a moratorium on the debt, postpone the maturity dates, change the rates, invoking the national interest. The most radical method of debt restructuring, employed by French monarchs, was to decapitate creditors, but this would no longer be applicable today. Another solution was to lower the share of precious metals in the composition of coins in circulation; the modern equivalent is to repay in monkey money through “competitive devaluation”. This is the perilous exercise that Timothy Geithner, the American Secretary of the Treasury, is currently engaged in with Chinese creditors. The third solution is to repudiate the debt as the Soviets did in 1917. The major disadvantage is to cut oneself off from the international community. The example of North Korea should give pause to those who might be tempted by the experience.
16. The possibility of a currency crisis
The dollar could decline significantly or even eventually disappear as an international reserve currency. Gold, on the other hand, could continue to rise on international markets because it would become the only solid standard compared to a fictitious fiat currency.
In Europe, it is the euro that is under threat. Even before the current crisis, London School of Economics economist Charles Goodhart noted the extremely divergent developments in competitiveness, labor costs and trade balances within the eurozone. Given the existence of a single currency and the ECB’s inflation policy, these divergences could only be corrected by reducing the growth and standard of living of countries like Spain or Italy. . It is therefore a safe bet that some member states of the Monetary Union would vote “no” if the decision to join the euro were to be taken now. Even before the current crisis, Goodhart estimated the probability of a collapse of the Monetary Union at 20%.
Do the Germans agree to make ends meet for the Greek government, and perhaps tomorrow settle the bill for Sarkozy’s “big loan”? Curiously, this essential question was not addressed when the euro was created. However, it is the very existence of the Monetary Union that is at stake. Conceived in good weather, this union was able to function during its first years. But the current situation brings us back to reality. The corset of the single currency does not erase the differences between countries, it exalts them, especially when there are no budgetary transfers and labor mobility. If a monetary crisis is avoided internally, it will affect the euro itself.
A return to a strengthened EMS would make it possible to avoid the disorderly breakup of the euro zone. The European Monetary System (EMS) was launched in March 1979. It was a system of stable but adjustable parities with fluctuation margins of 2.25% around the central parities (until August 1993), except for certain currencies weak who benefited from margins of 6%. The European agreement on this exchange rate mechanism was supplemented by the creation of the ECU, which was a composite monetary unit made up of a basket of determined amounts of each community currency, including those which did not participate in the exchange rate mechanism. Each currency therefore had a pivotal rate in ecu and a market rate. Credit facilities were provided to defend parities within the SME. While ensuring a certain integration, the EMS allowed parity readjustments.
17. The outlook: a prolonged crisis and opportunities for change
Increasing real estate foreclosures, risk of bankruptcies in certain states, crash of commercial real estate and related CMBS, reset of Alt-A and “option ARM” loans, suffocation of short-term financing by commercial papers, credit card crisis , accounting camouflage of bank losses, inability of banks to lend to individuals and SMEs in an environment where credit risk is growing…the American and international economic situation is not very bright despite a recovery that occurred in mid-2009.
This crisis will lead to an irreversible loss of jobs in certain sectors (construction, finance, durable goods, etc.), resulting in persistently very high unemployment; the absence of new jobs in sufficient quantity to compensate for job losses; the ineffectiveness of policies to support growth through exports, with the contraction of world trade and, for the euro zone, the risk of currency appreciation and then implosion of the monetary system; the disappearance of the model of supporting activity through increased debt; the need to rebalance public finances through restrictive budgetary policies; the acceleration of relocations with the gap in growth and production costs between emerging countries and OECD countries; to the distortion of income sharing to the detriment of employees, with high unemployment and relocations. Erratic movements in stocks, oil and commodities are expected, with gold rising and the dollar falling (the latter has already lost almost 20% of its value since March 2009).
This crisis is not only an economic crisis but also a societal, identity and mental one. Because the collapse of the consumer society will not remain without consequences on the consumerist, hedonist and individualist values which have been promoted by those in power for decades and have largely contributed to causing this crisis. More compassionate values could be reborn in the face of the situation. A certain number of government projects presented by him as intangible, such as the euro or immigration, will have to be called into question. Faced with growing deficits, the state bureaucracy which wants to control everything could be placed in a situation of even greater impotence, while its unbridled expansion will make it even more unbearable. As a result, civil society may be forced to enter the process that will allow it to relearn how to organize and ultimately experience new vitality.
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