Never bark at the big dog. The big dog is always right.
To begin with, I have said all the way that the European crisis is a welfare-state crisis, not a financial crisis. The blow to the banks from the financial-market problems of 2008 would never have caused the ripple effects it did, had it not been for the fact that banks in Europe had invested so heavily in government treasury bonds.
The banks thought – for obvious reasons – that those bonds were the safest investment they could make, that large investments in treasury bonds would provide them with a rock-solid low-risk platform for their portfolio management. But then the welfare states in Europe kept on spending on their entitlements, despite the fact that scores of taxpayers were either unemployed or earning fractions of what they would in a strong economy. They started having problems paying their creditors – i.e., the banks.
Low-risk treasury bonds became high-risk assets. Bank portfolios were totally upset, leaving them with much more of mid-to-high risk assets than was healthy for them.
Today the British news site The Commentator confirms my analysis, using Cyprus as an example:
When the European Union (with German money) mounted its most recent bailout of Greece, one of the conditions was a 75 percent write down of Greek government debt. For the Cypriot banks, which had made loans to the Greek government totalling 160 percent of Cyprus’s GDP, this was disastrous.
I was also right about the true purpose behind the Cyprus bank heist. Yesterday I explained that the plan to confiscate bank deposits was not going to be a one-time exceptional event, but was instead intended to set a new precedent for future bank-deposit confiscation raids:
Again, the two-fold goal of the Cyprus bank heist is to secure the euro zone as it is and to cause a long-term depreciation of the euro. In order to accomplish the latter, the Eurotarians have to create a certain, calculated level of capital flight from the euro zone. There are several ways to do this, but the instrument they have chosen – seizing bank deposits above a certain level – is devious enough to work. However, to cause a “right-sized” exodus you cannot limit the scheme to one country. You need others to follow.
British daily newspaper The Guardian has a story that confirms my analysis:
Fears that bank accounts could be raided in any future eurozone bailouts spooked markets on Monday, as Cypriots prepared for their banks to reopen for the first time in over a week on Thursday following a deal to secure a €10bn lifeline. Markets took fright after the head of the group of eurozone finance ministers indicated that the Cyprus rescue could be a template for similar situations.
And then the question is: what is a similar situation? Again, the Cyprus bank heist was not about taking deposits from individuals to rescue the banks where they had their money. The purpose was instead to take depositors’ money to give to government, which then used it to prop up ailing and failing banks.
The difference may seem like a technicality, but it is not. The fact that government is the middle man is crucial: it is right there that you find the precedent in this confiscation scheme. Government took money from large-balance accounts because it did not have enough cash for very important expenditures. Next time the very important expenditure does not have to be a bank, or even a financial institution. It could just as well be an urgently needed but financially strapped income-security system (Americans, think TANF or even Social Security).
The purpose behind the Cyprus bank heist was not primarily to save the banks – that could have been handled in a much different way by, e.g., the ECB printing another five billion euros – but instead to establish that government can raid the bank accounts of private citizens under the auspices of some kind of fiscal emergency.
It is not far-fetched to guess that many governments in small EU member states are now salivating over the opportunity to raid the bank accounts of their own wealthy citizens. The fact that the Cypriot government appears to be ready to take 40 percent above 100,000 euros makes this an even more attractive “revenue tool” for Europe’s cash-strapped welfare states.
It is this realization that is now setting in on investors all across the euro zone. The Guardian again:
[All] markets erased their early gains to close down on the day. The FTSE 100 index lost 0.2% and the German stock market fell 0.5%. Bank shares fell across Europe while the euro, which had nudged up through $1.30 initially, fell back to below $1.29. US markets, which had largely shrugged off the Cypriot problem, were also lower, with the Dow Jones Industrial Average down over 70 points, 0.5%.
The decline in Dow Jones is temporary, while the decline in Europe is the beginning of a permanent downward adjustment. Again: one of the ideas behind the Cyprus bank heist is to start a process that stokes fear in financial investors, resulting in a moderate outflow of funds from the euro zone. This will in turn cause a depreciation of the euro.
Germany needs this downward adjustment to compensate its export industries for the ridiculous shift to a much more expensive system for producing power.
Yes, politics can be that cynical. It is a risky strategy, but so is any high-end manipulation of the course of events, either in politics or in the economy.
In fact, if the Cyprus bank heist was repeated in a couple of more countries, it would give the desired financial outflow the boost that German leaders are calculating with.
And they may get exactly what they want. The Guardian again:
Malta’s finance minister wrote an article in the Malta Times expressing concern about what would happen if it encounters similar problems in the eurozone.
But this ill-intended, well-hatched plan also puts on full display the arrogance with which Europe’s political elite runs its new kingdom. They are either oblivious to, or dismissive of, the severity of the crisis that Europe has been stuck with for the better part of four years. This crisis only seems to get deeper and more entrenched for every move that this political elite makes. Der Spiegel has a good analysis:
It has been only four weeks since German Chancellor Angela Merkel had nothing but nice things to say about her “very esteemed” counterpart in Cyprus. In a telegram to newly elected President Nicos Anastasiades, she “warmly” congratulated him on his election victory and wrote that she looked forward to their “close and trusting cooperation.” That was then, as Merkel conceded last Friday in a speech to the parliamentary group of her center-right Christian Democratic Union (CDU) at the Reichstag in Berlin.
I could say something funny here about the fact that the German parliament is once again referred to as Reichstag – something about how it is easier to rule a continent by means of a common currency than by means of a common army. But let’s leave that aside. Back to Der Spiegel:
Although her intent was not to set an example, she said, Germany also would not “give in.” She added that there would be “no special treatment” for Cyprus. And over the weekend, she lived up to her word. … Since Cypriot parliament rejected the initial bailout plan, one crisis meeting followed the next in Berlin, Frankfurt and Brussels as concepts were presented, revised, rejected and resubmitted. In the end, the European Central Bank (ECB) imposed an ultimatum on the country. The message from ECB President Mario Draghi was that either Cyprus agree to the bailout conditions or it could be the first member of the euro zone to declare a national bankruptcy.
The technical meaning of that would be that Cyprus would have left the euro zone, reinstated its national currency and re-denominated all its debt in that new currency. Most analysts would contend that such a move would have led to a drastic depreciation which in turn would have caused foreign investors in Cypriot treasury bonds, as well as in private banks, to lose money.
However, there is a real possibility that the opposite would have happened: with Cyprus out of the euro zone the country could de facto have reinforced its position as a low-tax jurisdiction with high respect for bank privacy. That would have led to a new inflow of foreign money, and eventually the little nation could actually have come out more prosperous.
Now they are facing the exact opposite scenario, as Der Spiegel explains:
In the end, Nicosia agreed. The country’s oversized banking industry is to be radically downscaled, one of its biggest banks, Laiki, is going to be dissolved and those holding accounts there will see volumes over the €100,000 insured limit potentially vanish. A worsening economy will almost certainly be the result.
Not to mention the ramifications for the entire euro zone:
Smoldering and flaring for the last three years, the euro crisis has reached a new stage. For the first time, a parliament rebelled against the requirements of international creditors, and for the first time euro-zone taskmasters tried to take a slice of the savings of ordinary citizens, prompting people throughout the continent to wonder whether their money is still safe. The unprecedented showdown led many in Europe to speculate over the national character of the Cypriots, and wonder: Are they especially jaded, desperate or simply nuts? Finding the right answer was the perplexing task for leaders in Brussels, Paris and Berlin. How far can one bend to demands from a teetering country like Cyprus without losing one’s credibility?
Actually, the real question is: how far can the European political elite bend their member states before they start breaking apart – or breaking away from the common currency, and perhaps even the euro zone? The jury is still out on that question, but there is no doubt that the political elite that runs Europe completely lacks understanding of the art of government. They have eradicated hundreds of billions of euros worth of GDP in several EU member states, just to preserve their precious union and at the same time gradually centralize control over fiscal policy. They completely dismiss the will of voters, either as expressed in elections, in a referendum or in the form of parliamentary representation. Cyprus is only the latest example, and certainly won’t be the last.
They are Europe’s authoritarian leaders and deserve to be called Eurotarians. They rule with very little regard for the half-a-billion people whose tax money they live off. they use instruments of power, such as austerity policies, to close the ranks of member states and if necessary oppress public opinion.
These instruments of power have thus far allowed the elite to win and become seemingly stronger. But at the same time, each new victory they score erodes the very pillars upon which they build their power. Der Spiegel makes a good point on this:
But a monetary union, at its core, is not held together by budget figures or austerity programs, nor by the statements of finance ministers and the heads of central banks, no matter how well-received they are in the markets. The most important glue holding together a monetary union is the mutual confidence of its members, and that has declined drastically in recent months. While many in the north question the willingness of politicians in Rome and Athens to bring about reform, citizens in the south are increasingly furious over the austerity diktats from Berlin, Brussels and Frankfurt. There are predetermined breaking points all across the continent, but they are more apparent in Cyprus than anyplace else. … the debacle over the debt-ridden island nation is more than just another financial crisis along Europe’s southeastern edge. It is emblematic of the entire monetary union. If the euro zone collapses, it will be because of both its economic contradictions and its members’ inability to reach agreement.
In other words, the attempts at keeping the euro zone together, by means of austerity and anti-democratic thuggery, have created a backlash that will combine a persistent economic crisis with an accelerating democratic crisis. These two are now merging into a perfect storm of uncertainty, unemployment and deprivation. Italy offers a great example, as illustrated by this story from Corriere della Sera:
Time is running out for Italian industry. Business is in a “desperate” condition with companies “very close to the end”. This umpteenth warning came from Confindustria chair Giorgio Squinzi during talks with the mandated prime minister, Pier Luigi Bersani, in which Mr Squinzi appealed for a swift return to “a stable government”. Given the three million Italians out of work, with a spike of almost 40% for young people, Mr Squinzi pointed out that the employment issue “is becoming a tragedy”. Confindustria had no option but to be “extremely concerned about Italy’s real economy”, warned Mr Squinzi. The Confindustria leader said “intervention is needed with absolute priority”, starting with payment of the public sector’s outstanding debts to businesses and implementing what he described as a no-holds-barred “shock treatment” for the first hundred days of government.
In the recent election Italian voters responded negatively to the bone-crushing austerity measures forced upon the nation by the EU and the ECB. Their response created a stalemate in negotiations for a new prime minister and parliamentary majority, which in turn has led to a standstill in legislative activity. There is no identifiable course of fiscal policy, which means uncertainty as to taxes and government spending. (This includes the macroeconomically small but microeconomically important problem of government contractors not getting paid.)
This uncertainty, ultimately brought about by the relentless pressure from the EU and the ECB, is making life increasingly desperate for Italy’s businesses and citizens. The private sector’s faith in, and respect for, a parliamentary government will at some point start eroding. Once that process gains critical mass they will either leave the country in order to invest elsewhere…
…or support political forces that are much more hostile toward the EU than what we have seen thus far in Italy. We got a foretaste of what that means in the Greek election last summer.
It would be an exaggeration to say that the common currency and the European project of unity are unraveling. That said, though, there is no doubt that Europe is inching closer to the point where both the EU and the currency union start falling apart. The institutional uncertainty of the continent has increased, while the reasons to invest there have weakened significantly.
Therefore, I will say it again: If you have any investments in the euro zone, get the money out ASAP.