The euro caught up with its birth defects
Thus, the result of 15 years of an accelerated European process appears as the worst possible combination. Paradoxically, the Maastrichtian project is on the one hand statist and bureaucratic, on the other monetarist and neoliberal. The European Monetary Union (EMU) project, far from being the nice modernization, the shift to the future praised by the power, is essentially a regression to the past. Politically obsolete, it is nothing but the inappropriate projection of the old statist schemes of the previous nation-states on a new situation. It takes the risk to lead to the creation of a potentially uncontrollable political power. Socially reactionary, it aims at deepening the social differentiation and to restore the previous hierarchies at the expense of the middle classes that have made the prosperity of Europe. Economically inefficient, EMU essentially benefits the political class and large corporations. But is sacrifices the interest of other categories of players. Such a currency, the feasibility of which is problematic in a context as diversified as Europe’s one, even to you eyes of orthodox economists, would normally presuppose a coherence of the economic, social, legal and cultural systems of the concerned countries, which, given the still deep differences that separate them, can only be realized very slowly. Introducing a single currency amounts therefore to establishing an acceleration instrument of this coherence, complying with the “violence of the currency” on economic and social structures. A deepening of the socioeconomic crisis, stamped with the prolongation of recessionary tendencies, the multiplication of brutal and ill-managed changes, and the deepening of social tensions, can now be feared. (Hunout & Ziltener, The International Scope Review, Volume 1, 1999, Issue I, Summer)
Patrick Hunout and Patrick Ziltener had, in the aforementioned article, diagnosed the failures inherent in the very design of the euro, and predicted the brutal and poorly managed changes that it would make inevitable, as well as its negative effects on growth and employment. Some ten years later, events prove them right.
Several aspects indeed characterize the current situation.
1. Evil is ancient
A bear market began in the early 2000s. It was beaten back by a reckless increase in cash and credit by monetary authorities following the pseudo-recession of 2001. In 2007, after a spectacular financial industry bubble and residential real estate, the bear market has resumed. In 2008-2009, stock prices crashed, hit a temporary bottom, and rebounded. In 2010, the final phase of the bear market may be beginning.
The year 2000 was, remember, not a computer bug that was announced and did not occur, but a human bug that resulted in an incredible wave of deaths and depression. It was the starting point of a great change – seemingly economic, but in reality more global – which resurfaced some 10 years later after a period of dormancy. This shows that finance follows the rhythms of universal energy. And how could it be otherwise?
At the beginning was the subprime crisis. In August 2007, the markets shook. By the fall of 2008, Lehman Brothers had gone bankrupt and stocks were falling around the world. The end of the beginning occurred on March 9, 2009. Stocks had lost about half their value…a loss of $25 trillion worldwide. The first phase had ended. The next phase was the rebound. It boosted stock prices everywhere — especially in emerging markets. Worldwide, stocks recovered about half of what they had lost during the first phase.
2. The economy has not been recovered
The prevailing discourse is that there is a recovery – this is the discourse of politicians and monetary authorities, and investors want to believe it.
But US statistics, the country in which the 2007 crisis began, show two to three years after a recession more than a recovery. Consumer spending is increasing, but this increase has been financed by savings, which have fallen back to its lowest level in two years. At the same time, US unemployment shows no signs of improvement. Overall, people who lost their jobs during the 2007-2009 crisis are still out of work.; many of these positions haven’t just been put on hold – they’ve been eliminated for good, and the economy is hardly creating new ones. Despite the trillions of dollars spent on stimulus of all kinds, there are 11 million unemployed and 40 million people dependent on food stamps in the United States, while hundreds of thousands of new graduates are joining the ranks of the homeless. job.
The unemployment rate is rising towards 10%, but this figure only takes into account people who have looked for work in the past year; the real unemployment rate is 17% or 18% of the population in total. And even those who have a job are seeing their income decline. With so many unemployed, wage increases no longer make sense; on the contrary, wages are falling. Supply increases, prices fall. The real estate market is not doing well either. The tax credit granted to first-time home buyers has also ended. As expected, rates of delinquent payments and foreclosures are reaching new records. One in ten American homeowners are struggling. Inventories of unsold homes remain extremely high. In Europe and Japan, the picture is hardly more encouraging. Growth is slow and unemployment is high. Governments have already used all their budgetary and monetary ammunition… They have already used more stimulus than any government in history. For what result? After $8 trillion in financial and banking guarantees, and the deepest deficits since World War II… all they got was a small increase in the economy’s numbers.
3. The stock market rebound in 2009 is largely due to government stimulus
The stock market rebound in 2009 is due in part to the profits of companies “relieved” of their staff, as well as to the interest rates maintained very low which make it possible to borrow to invest cheaply. But this rebound concerned low volumes and only partially offset previous losses. It is not a sign of real economic vigor. The Wall Street Stock Exchange has only risen in the financial market thanks to the shares of companies at the bottom of the abyss, kept on artificial respiration by public funds. Without these titles, trading volumes would even have declined.
However, what happened in 2009 was truly out of the ordinary. First point, the recovery has been extremely strong. More than 50% on the S&P 500 between March (the lowest point) and September (six months later). Much more than any recovery since 1940! But trading volumes contracted continuously from March until the end of summer. A recovery without volume… But volumes recovered significantly during the month of September on the S&P 500. The rise in trading, however, is based on a handful of securities, well-known securities such as: Fannie Mae, Freddie Mac, Citigroup , AIG and Bank of America. These five companies suffered losses in 2009 of 74 billion dollars for Fannie Mae, 22 billion for Freddie Mac, an improvement compared to the 50 billion lost in 2008, 2 billion for Citigroup, after a tiny loss of 18 billion in 2008, 11 billion for AIG, nine times less than the 99 billion in 2008, 2 billion for BoA. These are financial securities that, in a free market economy, would be dead and buried.
Furthermore, the 2009 bull rally was partially due to and fueled by misleading information from governments and investment banks. The surreal rise in stock market indices was the result of a formidable price manipulation enterprise and a disinformation campaign skillfully orchestrated by a handful of institutions with hegemonic power of influence. Some of them have also made a specialty of creating asset bubbles by exploiting the blindness and intellectual laziness of systematic trend followers in order to take contrary bets and reap the stake several times over.
4. The credit bubble was transferred to the state budget
It took trillions of dollars in stimulus measures and loan guarantees, and an unprecedented coalition of G20 countries to turn around the economy after the collapse of Lehman Brothers in 2008. To stem the panic that erupted then seized control of financial markets, governments transferred a gigantic quantity of private debt to public accounts. Another economic model has replaced the previous one: States seek to replace the effects of the expansion of the credit bubble by embarking on a headlong rush into the public deficit, which reaches an intensity almost comparable to that of a period of war (8 to 12% of GDP depending on the country). The markets started to rise again, hypothesizing that this “new” model (in fact it is only an amplified version of previous state debt stimulus) could work sustainably and be extended as long as necessary. until the economy takes off on its own. Then the Greek debt affair broke out. Greek public debt represents around €400 billion. Around €150 billion would be enough to bring it back to a reasonable level. An amount which is within the reach of other European countries, and which represents approximately 1 1/2 months of the US public deficit. But here again, the real question is that the problem of Greece could be a warning signal which tells us that the headlong flight of States in public debt is about to reach its limits, that the current model is going therefore break in turn. Greece is in fact far from being isolated. The states on the periphery of Europe (Spain, Italy, Ireland and Portugal – the PIIGS) are in a very similar situation. We can even say that the level of debt of states like Great Britain, the United States or France is quite similar to that of Greece.
Of course, the market may refuse to heed the Greek warning for a few months. Here too, stopping the upward movement now would require operators to accept that a model (state recovery) which seemed to work for decades (ultimately creating the greatest financial imbalance in history) would cease to exist. do it today.
Today, the debt of these States worries investors and no escape is possible this time. With the sovereign debt problems of the euro zone, a new phase of the crisis is opening which could prove even more difficult to resolve. The explanation is known: Greece was considered for years – “wrongly, because there was no common budgetary and tax policy”, says Professor Krugman – as part of an integrated whole. She was thus able to borrow for too long at rates that were too low. Like Portugal, Spain or even Ireland.
5. The budgetary crisis of States is transforming into a monetary crisis of the euro
In 2007, the market was wrong to fall for the myth that the subprime crisis was not contagious. The temptation was strong to believe that the transfer of rotten debts from the private sector to the balance sheets of central banks (and taxpayers) had neutralized their harmful character. A surge of money created ex-nihilo (more debt added to debt) was supposed to maintain the illusion of an end to the crisis. We refused to take into account truths that have been disturbing since the end of November/beginning of December 2009 (collapse of the real estate sector in Dubai, Icelandic bankruptcy, degradation of the debt issued by Athens). This is now followed by the fear that the bankruptcy of Greece will sound the death knell for a monetary union which has refrained from developing structural adjustment mechanisms in the event that strong economic disparities put some of its States in difficulty. members.
The Greek crisis and that of the PIIGS lead to the weakening of the monetary dogma which was supposed to bring us guaranteed growth as well as an essential shield against various financial and economic shocks.
We do not see how Greece could avoid leaving the euro, which would certainly be the only effective solution for it to return to growth, rather than locking itself into a policy of deflation for many years, leading to depression. economic and serious social and political risks. After all, Argentina experienced similar problems which it overcame in a few years, after having removed its currency from parity with the dollar (despite the misguided efforts of the IMF to “save” it with loans, assorted of the imposition of a restrictive policy, an error that the institution is repeating today with Greece) and after having defaulted on the repayment of its debt. Greece must therefore choose between prolonged depression accompanied by political unrest, and leaving the euro with repudiation of its debt, partial or total. Prolonging the denial of reality will not improve the patient’s condition but will make it even worse.
If it is true that Greece will need annual growth of 7.5% to be able to pay only the interest on its current debt without talking about the formation of new debt over the coming years, then, taking into account of the economic depression that the government’s austerity program is sure to cause, it seems impossible that Greece will not default on its payments in the near future. In this regard, the aid plan announced with great fanfare by the EU has only bought time, perhaps allowing European banks heavily exposed in Greece to get rid of their risky assets.
Given the growing disparities between countries which cannot manage their competitiveness and inflation differentials by devaluing, the euro zone itself could be condemned to disappear or to suffer very strong turbulence. For example, the inflation differential between France and Germany in the last ten years (years of the establishment of the euro) was 35%. This should normally have resulted in a devaluation of the French franc but could not, and for good reason.
The creation of the euro was an absurd idea put forward by French apparatchiks to force the political integration of the European Union. It has made the economy worse, because a currency is not decreed overnight, but emerges following a long historical process of progressive confidence, moreover in a non-optimal zone because it is too heterogeneous and whose none of the rules she had to follow were respected.
It is clear that the current crisis shows the validity of the theory of optimal currency areas and the fundamental role of an adequate exchange rate for continued growth. The developments observed since 1999 have shown, conversely, the inanity of the astonishing theory according to which the creation of a common currency would be enough to force dissimilar economies to converge towards the same rate of inflation and comparable growth rates. .
6. The reactions of political leaders are not up to the situation
The reactions of political leaders to the new stage of the crisis, a stage which began at the end of 2009 with doubts about the solvency of Greece, should consist of liquidating the excess debt in an orderly manner, which in certain cases supposes accept supervised bankruptcies (negotiations with creditors for a reduction in the amount of the debt in exchange for any guarantee of reimbursement from a State), – and to drastically reduce the lifestyle of States to restore the budgetary balances essential to maintaining a sufficient level of confidence in the currency among creditors and suppliers.
Instead, political leaders are falling into headlong flight:
– Search for a scapegoat: speculators or rating agencies for example. The idea of creating a European rating agency amounts to allowing governments to rate themselves.
– Avoidance of reality: rather to restore competitiveness, ask countries with a trade surplus to stop making trade surpluses. The boomer in fact doubts absolutely nothing, he is convinced of being at the center of the universe and convinced that everything is due to him. It therefore seems entirely natural for him to ask exporting countries, which produce real wealth, save and work, not only to kindly finance his lifestyle on credit, but also to ensure that these countries then correct even more kindly. the imbalances caused by this life on credit.
– Leakage in monetization: a State spends too much and can no longer find lenders to finance its lifestyle? Never mind, he will ask the ECB to buy his debts at a gift price (rate) by providing him with all the necessary euros and there is no longer a problem! The countries that supply us with oil, uranium, raw materials and various consumer goods will continue to give us indefinitely everything we need for our comfort as consumers in exchange for the euros printed en masse by the ECB. And countries like Germany will be enthusiastic about printing euros to give to the most spendthrift and irresponsible countries and will not worry for a moment about the risk of a collapse in the value of the euro.
– Save time: the European aid fund is an “innovative” system and is financed entirely by loans from European Union member states, almost all of which are highly indebted and in a situation of very high public deficit. So spending states borrow to allow even more spending states to borrow more. Clearly, it is a question of digging one hole to plug another (while at the same time digging other holes to finance the countless public deficits existing in parallel). And it’s called a “euro area stabilization mechanism…”.
– Hiding the problem: In practical terms, with Greece’s CDS at rates above 1,000 basis points, it will cost you $1 million to insure $10 million of debt over five years against default of Greece. The markets are thereby indicating that Greece’s debt is simply not going to be repaid, or that it will not be repaid at the level of the loans that have been granted. This is also why we can expect to see European and American regulators close the CDS markets to prevent market valuations from communicating too much information about the dismal state of finances. governmental.
– Escape into fiscalism: it is good for governments to review their budgets and eliminate unproductive spending, provided that this is done intelligently. Even the elimination of tax loopholes can be good to the extent that it can constitute the first touch of the introduction of the flat tax allowing effective control of citizens over the States. But the plans to increase VAT show that the government still hasn’t understood anything and continues to put pressure on a passive society that they want to suffocate a little more without any brakes.
Instead, we must recognize that rotten structures must fall to make way for renewal. This involves setting rules for leaving the euro, and gradually abandoning this chimera in favor of a strengthened EMS. This involves more broadly calling into question fiat currencies whose value is based on the whim of States and the central banks which are their emanation. Finally and above all, this involves the planned bankruptcy of States, not in the sense of a payment default, but in the sense of a progressive liquidation of their hypertrophied, useless and counterproductive activity, and a transfer of power to organized civil society.
