I … Ambrose Evans-Pritchard in article Spain Is Trapped In A Perverse Spiral As Wage Cuts Deepen The Crisis writes that Pierre Lellouche, France’s Europe minister, compares the (EU’s €750bn “shield” for eurozone debtors) shield to NATO’s Article 4, the mutual defence clause that deems an attack on any one state to be an attack on all.
Whether intended or not, Mr Lellouche may have pulled the detonation plug on EMU by boasting that Europe’s politicians had created an EU debt union on the sly. “It is expressly forbidden in the treaties. De facto, we have changed the treaty,” he told the Financial Times. How will that go down at Germany’s constitutional court, already facing a growing in-tray of claims that these bail-outs breach the Maastricht Treaty?
For Spain it has been a horrible week. The central bank seized CajaSur and imposed draconian write-down rules on banks to restore confidence. The Spanish Socialist and Workers Party (PSOE) of Jose Luis Zapatero then rammed a 5pc cut in public wages through the Cortes by a single vote, shattering consensus. The government cannot hope to pass a budget. Its own trade union base is planning a general strike.
The sub-text of Fitch’s 32-page report shows Mr Zapatero’s self-immolation to be futile in any case. The agency has not downgraded Spain for lack of austerity. Its implicit conclusion is that the policy of 1930s wage cuts – or “internal devaluations” – being imposed on southern Europe’s humiliated states as a quid pro quo for the EU shield is itself part of the problem. Ultra-austerity will bleed the economy, shrivel tax revenues and fail to close deficit anyway. “Fitch believes the risk that economic growth will fall short of the government’s projections,” it said.
El Pais spoke of a “perverse spiral” in its editorial. “The Fitch note drives home the apparently unsolvable contradiction in which the Spanish economy finds itself. To maintain debt solvency Spain must squeeze public spending: yet this policy undermines the chances of recovery which itself causes further loss of confidence.”
Spain’s unemployment was already 20.5pc even before this latest dose of shock therapy. There are 4.6m people without work. Dole payments alone account for half the budget deficit. By comparison, the Anuario Estadístico shows that Spain’s unemployment never rose above 9.5pc during the Great Depression . The economy shrank by 3pc from peak to trough. The Zapatero slump is worse than anything inflicted by Gil Robles during the Bienio Negro.
It is no mystery why Spain is trapped in depression. The country joined the euro without grasping its Faustian implications, as did others. Germany was equally naive in thinking it could have a currency union entirely on its own terms.
EMU caused Spanish interest rates to halve overnight, with dire results as the Bank of Spain’s governor confessed in April 2007. “The single monetary policy has meant that excessively loose conditions for our economy have been almost continuous,” he said.
Real rates were -2pc as the bubble reached its crescendo. Nearly 800,000 homes were built in 2007, more than in Britain, Germany, and Italy combined. There is now an overhang of 1.6m unsold properties, six times the level per capita in the US. Total public/private debt has reached 270pc of GDP.
The boom was a debt illusion, just as it was in Britain but with the added twists of lower wealth to offset household debt and a global investment position that is underwater by 70pc of GDP. Britain still has the instruments to extricate itself. The Bank of England has engineered a devaluation of 20pc, restoring competitiveness at a stroke. Spain can try to claw back an even greater loss by cutting wages, but that risks a slow death by debt-deflation as compound interest tightens its vice.
This can end only in two ways. Either Germany tolerates massive monetary reflation by the ECB, or Spain will be forced out of EMU, setting off a catastrophic chain-reaction through north Europe’s banking system.
Your choice, Berlin.
II … In reply to the Pierre Lellouche quote: “It is expressly forbidden in the treaties. De facto, we have changed the treaty”, it is important to realize that a crisis arose from interest rates rising on Greece’s sovereign debt that threatened to the value of the Euro, FXE, and the stability of European Financial Institutions, EUFN, requiring the European leaders led by Herman van Rompuy and Angela Merkel, to meet in Summit in May, and announce an agreement to stabilize the Euro, by providing seigniorage aid to Greece. The Leaders’ Announcement did not “change the treaty“, it superseded the treaty.
Glenn Beck in Video and Transcript Press Release relates that our leaders are laying the foundation for global governance and he documents this with the Stephen Harper quote “In a globalized economy, we are going to have to take global responsibilities.” The leaders are taking on responsibility for global governance, a case in point is the May 2010 Europe Summit of Finance and State Leaders who funded the Euro Stability Pact establishing European Economic Governance, a common European Treasury to sell debt, to buy distressed sovereign debt and provide seigniorage aid for Greece, and to commission Herman van Rompuy to lead a task force to discuss and suggest policies and mechanisms to further stabilize the Euro.
The EU Finance Ministers’ Summit announced a sacrifice of national sovereignty to preserve the integrity of the Euro. The Leaders’ announcement established a unified economic, political, fiscal, monetary and seigniorage government for the entire eurozone. The age of sovereign nation states in Europe is history; global governance has commenced.
Yes, European Economic Governance has commenced. A region of global government has coalesced as envisioned by the Club of Rome in 1974. Wikipedia relates that The Club Of Rome developed a plan to divide the world into ten regions: In 1972 The Club of Rome raised considerable public attention with its report Limits to Growth, which has sold 12 million copies in more than 30 translations, making it the best-selling environmental book in world history. Before Limits to Growth was published, Eduard Pestel and Mihajlo Mesarovic of Case Western Reserve University had begun work on a far more elaborate model (it distinguished ten world regions and involved 200,000 equations compared with 1000 in the Meadows model). The research had the full support of the Club and the final publication, Mankind at the Turning Point was accepted as the official Second Report to the Club of Rome in 1974. In addition to providing a more refined regional breakdown, Pestel and Mesarovic had succeeded in integrating social as well as technical data. The Second Report revised the predictions of the original Limits to Growth and gave a more optimistic prognosis for the future of the environment, noting that many of the factors were within human control and therefore that environmental and economic catastrophe were preventable or avoidable, hence the title.
Earth Times reports that the European Commissioner For Economic Affairs, Olli Rehn, warned Tuesday May 25, 2010 at the Brussels Economic Forum, that the European Union risks economic stagnation and mass unemployment unless its member states pursue “ambitious structural reforms in the coming five years.” Mr. Rehn stressed those plans could be enacted without time-consuming amendments of EU treaties, “which is important because we have a sense of urgency and we do not have the luxury of time.”
Herman van Rompuy believes a Crisis Cabinet is the Missing Link in the Eurozone Crisis debate.
The President of the European Council Herman van Rompuy proposed a “crisis cabinet” reports Honor Mahony of the EUObserver on May 25, 2010 in article Van Rompuy Wants Clearer Hierarchy To Deal With Future Crises. He said that “there is not much hierarchy or organic links between the main players and the main institutions”.
European Commission President Jose Manuel Barroso, the head of the European Central Bank Jean-Claude Trichet and Mr Van Rompuy himself would be the Triumvirate in this “crisis cabinet”.
And Honor Mahony again reports that at the same time the President of the European Commission, Barroso, called Germany’s plans on improving economic governance in the eurozone as “naïve”. He believes that any treaty reform is not feasible in the moment.
Mr. Evans-Pritchard in writing “This can end only in two ways. Either Germany tolerates massive monetary reflation by the ECB, or Spain will be forced out of EMU, setting off a catastrophic chain-reaction through north Europe’s banking system” gives the clarion call for investing in the safe haven of gold; while one could invest in the gold ETF, GLD, I personally am invested in gold coins.