Financial Crisis | paulhunterjones

This past week German Chancellor Angela Merkel received some good news in her battle to save the EZ. The German Federal Constitutional Court , a highly respected institution in Germany, ruled in favor of the chancellor’s power and right to take part in bailouts of debt ridden EZ members. An interest group who opposed the bailout of Greece filed the case that was decided. The Court’s ruling did not give the Chancellor a complete victory. The Court held that the Chancellor had to seek the Bundestag’s (legislature’s) approval for any future bailouts. Still, Chancellor Merkel hailed the decision as an endorsement of her policy to use German resources to save the Euro. I disagree with the Chancellor’s interpretation of the Court’s decision. The German head of state must understand that the Court issued a legal ruling and not a political statement supporting the bailouts. The decision does not address the merits of the Chancellor’s decisions, policies or actions relative to the bailouts. Unfortunately, the Chancellor’s political fortunes are tied to the success or failure of the already issued bailouts. I doubt that there will be any more large bailouts in the future.

The week’s bad news for Chancellor Merkel was that Greece had not yet taken any affirmative steps to carry out the agreed upon austerity measures. Greece’s failure to follow EZ indicts hastens the demise of the financial organization.

In a earlier posting I argued against a financial bailout of Greece’s economy. In a later post I warned that continued financial help to Greece would lead to the collapse of the EZ. I did not understand the logic behind promising to lend more money to Greece before it took any real steps to implement the required austerity measures. In the past Greece had failed to carry out agreed upon austerity measures. Why would the EZ leaders think that this time Greece would (or could) start to organize its finances? I posed the simply question; what would the EZ do if Greece failed to carry out (again) the austerity measures? I think that Chancellor Merkel has to now face her worst nightmare and consider the possibility of this eventuality.

This week EZ leaders expressed their dismay with the lack of progress Greece had made in implementing the austerity measures. Evangelos Venizelos, Greece’s finance minister, defended his government’s efforts to comply with the EZ’s budgetary package. He asserted that Greece’s relationship with the troika, experts and monitors from the EU, IMF and ECB, were on an even keel. Yet, it is widely known that the troika suspended its latest monitoring mission to Greece. It is believe that the leaders of these groups are frustrated by Greece’s foot dragging and excuses. Now Greece seeks to delay the implementation of many of the agreed upon reforms. Experts are now predicting that Greece will miss its deficit target unless it immediately slashes spending.

Peter Spiegal, Brussels Bureau Chief of the Financial Times, recounts his conversations about Greece with attendees at this year’s Ambrosetti conference. The workshops and forums were held in Northern Italy from September 2 2001 and concluding on September 4, 2011. Mr. Spiegal expressed surprise that many attendees were willing to discuss the possibility that Greece might not continue as a member in the EZ. He stated in the interview that many of the attendees now believe that it might be necessary to force Greece out. The Brussels Chief said that six months ago many people would not have considered this a possibility. You can see the video of Mr. Spiegal’s interview on his conversations with attendees at the Ambrosetti conference.

In another related development the chief of the International Monetary Fund, Christine Lagard, urged policy makers of the Group of 7 to take bold and joint action to curb the global economy crisis. She set the stage for the finance ministers’ meeting in France. Ms. Lagard correctly described the world as “collectively suffering from a crisis of confidence in the face of a deteriorating economic outlook.” The IMF chief specifically alluded to the EZ countries that had already received EU and IMF rescues. Ms. Lagarde said publically what most leaders and experts are privately saying; Ireland, Portugal and Greece shoulder the burden of meeting their deficit targets. Her subtle though firm message was that these countries would not receive any further financial help.

Against the back drop that Greece was not implementing the austerity measures, the G-7 finance ministers and central bank governors met in Marseilles France. Their two-day meeting did not produce a joint strategy for jump starting their stalled economies. Actually the meeting failed to produce any tangible or meaningful results. Just like the EZ the G-7 consists of nations that have divergent sovereign interests that prevent unity of purpose and action. The G-7 meeting concluded on a note of resignation and unfulfilled promises.

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I am not surprised that recent Eurozone (EZ) policy changes and actions did not produce the expected results of improving the confidence in the European markets. The debt crisis continues to spread from country to country. The EZ should abandon the practice of political symbolism, which does little to reduce the continent’s financial problems. The costly bailout of Greece set in motion policies and requirements that the even the healthier EZ countries do not want to meet.

Just this week the leaders of France and Germany met in Paris to reaffirm their support of the Euro. French President Nicolas Sarkozy’s and German Chancellor Angela Merkel’s press statements after their meeting pleased no one and disappointed everyone. The leaders called on members of the EZ to incorporate into their respective constitutions measures (the Golden Rule) that would require balanced budgets, debt reduction initiatives and general financial discipline. They both opposed issuing collective bonds that would spread responsibility for governmental debt across member states. The leaders also ruled out any immediate increase in the bailout fund. The message that came out of Paris was clear; Germany and France are reaching their limits, both politically and economically, in trying to rescue the floundering economies of other member states. Spain, Portugal and Italy who are on the verge of default understood the French and Germany leaders’ message that they should not expect the same kind of bailout, if any, that Greece received. Germany and France are not going to invest the future of their citizens into additionally risky bailouts. I believe that EZ two healthiest nations have grave doubts that the bailout of Greece was either financially prudent or politically necessary.

Regardless; the joint announcement out of Paris did little to calm the European financial markets. In the days after the meeting the European markets gyrated wildly and moved lower by this weekend. Confidence in European banks is plummeting to all time lows. Banker worry that they will have to charge their better clients more to borrow money. In turn banks will have to pay more for loans they receive. The credit crisis is getting worst by the day. It is not difficult to understand why banks in France or Germany do not want to fund bailout program of Spain, Portugal and Italy; the prospect of being asked to make bad loans requires them to charge their better customers more to borrow.

In an well written article entitled “The Decline and Fall of Europe,” which appears in the August 22, 2001 issue of Time magazine, Rana Foroohar warns of the fall of the old guard. He believes that the golden age of Europe and the West is beginning to fade into history. The ever more dismal economic news coming out of the European continent confirms his assessment. He argues that the EZ is essentially a selfish union. He writes that “…Europeans wants to benefit economically from the proximity to one another and want at all costs to avoid expensive and destructive wars either trade or shooting with their neighbors.” The EZ does not depend on free market principles and global competition to drive and fuel it members’ economies. The EZ’s belief that politics and legislative initiatives could create a dynamic, powerful and unified European economy was naïve to begin with. Foroohar correctly states that the EZ members’ divergent political views, various cultures, and differing social agendas conspiracy to defeat economic unity. If it is to survive as an institution the EZ must re-make itself to adapt to changing times and realities.

If a scientist conducts an experiment to prove a theory and it does not work, he tries a different experiment. The scientist does not keep repeating the same experiment knowing that the result will always be the same. I think the time has come for the EZ to try something different.