The battle lines have been drawn as the next evolution of the crisis in the Eurozone will likely be determined in the next 12-18 months as austerity runs up against the socialist agenda. The problems are real and the solutions are evident. In order for the Eurozone to survive the shift from a fragmented confederacy of states to a constitutional union with a primary central bank with the ability to issue its own currency is crucial. However, without unification under a binding agreement the future of the Eurozone is bleak and the next crisis will sweep the globe.
The problem today is “too many chiefs and no Indians”. The political dam has broken in Europe as German Chancellor Angela Merkel no longer has enough allies within the group of the EU prime ministers to impose her agenda. Merkel’s methodical plans are disintegrating on every front which means that sooner, rather than later, a confrontation is going to occur. The question will be whether Germany will bend to more a more socialist agenda, give up austerity measures and return to unbridled deficit spending or will a lasting compromise be reached. I currently believe that both outcomes are unlikely and it will resolve into a grudge match on a grand scale.
Unlike the U.S. which is a monetary union of 50 states with governments operating under a single constitution, central bank and government, the Eurozone is a cluster of states each with an independent government which were happy to work together as long as there were benefits. However, now that the system is broken no one wants to be responsible for fixing it and instead have resorted to idle threats and finger pointing. Without some cohesive authority to impose resolutions and solutions the end is inevitable. It is like asking a group of school children who stole the eraser. While there are many accusations and finger pointing – no one is willing to take the blame. Not even the child with chalk dust all over his hands.
The shortsightedness of the citizens, both in Europe and the U.S., is troubling. The recent elections prove that most Europeans continue to want other people to continue paying for their socialism and unwarranted lifestyles. The problem with that, which is already evident, is that at some point “other people” will no longer be willing to give you money. It is at that point that the crisis emerges. However, Europe, very much like the U.S., is not ready for real reform. The anti-austerity and fiscal profligacy have won out in the recent elections in France and Greece and are a death knell to resolve the issues that face the Eurozone. Welfare-state dependents around the globe will not yield their benefits until the markets force reform upon them. This will not be the first time either as history is replete with governments that ran the limits of spending and debt. Over the past 800 years no country has ever done what is necessary to fend off a financial crisis before it occurs and this time will likely be no different. This is why it is very likely that a new, more virulent European debt crisis will soon appear.
While the mainstream media and analysts continue to press for more liquidity in both the domestic and international economies – they dare not address the issues of this potential for a new debt crisis, who will fund continued socialism or how that will affect European bonds which are producing large losses for Euro banks, the ECB and other central banks. The stunning victory of the French Socialists and wipeout of mainstream parties in Greece show that the voters are unwilling to sacrifice for their future’s sake. Conservative rebel Panos Kammenos, who stormed out of nowhere, has put himself in a strong position and says that the bailout is destroying Greece’s sovereignty, condemning it to become a powerless province in a “federalist” Europe that he describes as a “Fourth Reich” dominated by Germany.
Greece’s New Democracy leader Samaras has asserted that they will accept responsibility to form a new government under two conditions which are that Greece stays in the EU and a renegotiation of the bailout package. The problem is that Germany has no interest in renegotiating the bailout package and ruled out reworking the fiscal pact this past Monday despite calls to do so by the French president-elect Francois Hollande. Angela Merkel is staunchly opposed to further “deficit spending” to feed economic expansion and believes in “growth through structural reforms” such as reducing the cost of job creation which has been successful in Germany over the last decade.
The problem is the austerity and economic growths are diametrically opposed to each other. It is like trying to lose weight by eating. It can be done but both must be balanced accordingly along with a supplement program of exercise. The same balance of diet and supplement has to be applied in the Eurozone and in the U.S. Austerity measures are required to reduce the debt burdens which act as a cancer on economic growth. However, implementing austerity through spending cuts negatively affects economic growth putting more pressure on the masses. Therefore, the cuts in spending have to be balanced against growth measures and supplemented with deficit spending, when necessary, to support the growth measures. However, and this is key, the deficit spending must be used only in manners that create a positive return on investment such as building of infrastructure. In this manner the deficit spending does not create a further liability but rather an investment that repays itself over time.
We have warned that the agents and beneficiaries of socialism will not go quietly into the night. So it is no surprise, except to the obstinate, that newly elected socialists in Greece and France have vowed to keep their pre-election promises and increase socialism. The reality is that the dark side of socialism (confiscatory taxes, redistribution of wealth, more debt, more government intrusion and central planning) trumps the expedient benefits of deficit spending when sovereign debt and banks are at the abyss.
For Germany it is a moment of truth. Berlin has put off hard choices since the crisis began. It has refused Eurobonds or budget transfers, stepping back from the Rubicon of fiscal union. Angela Merkel has insisted on austerity and reforms alone, imposing the full burden of adjustment on the weaker states. Merkel has brushed aside arguments the EMU’s crisis is in essence a North-South imbalance in trade and capital flows that cannot be corrected in this fashion within a currency union.
The seeds have been sown and yet everyone is currently assuming that a crisis will not blossom or if it does that authorities will quickly rush in to squelch it with a liquidity fire hose. The problem with short term fixes is the long term economic ramifications as continued increases in debt service reduce economic prosperity. It is imperative that in very short order that the individual states that make up the European Union actually come together as an Union. Working together and balancing the austerity with growth reforms with supplements of productive deficit spending the EU can survive. However, continuing down the current path will lead to the next financial crisis that will likely be worse than the last.