I’m still working on my “big picture” notes, so on Mondays I’m going to continue focusing on current events until I’ve finished those notes and put them in order. Today I want to take a quick moment to point out two interesting articles I read this morning in Great Britain’s Daily Telegraph.
The first, from last week, is a diatribe against ECB Chief Mario Draghi’s injection of another half-trillion euros into the EU banking system (bringing the total to over a trillion euros in just the past few months alone). Jeremy Warner backs up the case I made last Friday, arguing that this is an incredibly dangerous move which merely delays the coming reckoning. I disagree with his brief take on the Fed, but his comments about the EU are spot-on.
The second is Ambrose Evans-Pritchard’s reporting on the recent but little-noted news out of Spain: namely, that Premier Mariano Rajoy has apparently informed “Merkozy” and Co. that they can go screw themselves forthwith! Now, it might seem like the Spanish are sick of being lectured on their spendthrift ways, and that they prefer to go on pretending that they can keep spending money they don’t actually have. And there is certainly much truth in that point of view. But in the end, it isn’t quite that simple, mostly because the strength of the euro puts Spain and Co. in a very difficult position.
Mr. Evans-Pritchard touches briefly on this problem — one that far too few policy-makers in the West are addressing seriously. And that is the central challenge posed by the EU’s monetary straight-jacket. Simply put, the EU is in an unprecedented bind, because its economies vary so drastically between the North and the South, yet all are tied together by the same currency.
I don’t have the time to address the economics here in-depth, but the basic problem is simple: the EU’s “Club Med” nations desperately need to get their fiscal houses in order. Yet in order to do so, they must also temporarily devalue their currencies in order to regain their competitiveness and productivity. But the northern countries have already gotten their houses in order (for the time being, at least), and they insist on maintaining a strong currency, due to the great threat that inflation poses to their prosperity.
The South is thereby left in the worst of all possible worlds: having to pursue unprecedented austerity without also offsetting those painful cuts through more “affordable” currency (thereby repeating some of the West’s worst mistakes of the 1930′s). So it’s understandable that the Spanish are revolting. And as Mr. Evans-Pritchard noted, the French will probably join them this summer when they (most likely) elect Socialist leader François Hollande as the new president of France. He is pledging to break with the Germans and pursue a Mediterranean-favored “spend our way out of this mess” agenda.
The “Club Med” countries would be crazy to pursue this course — doing so would just swing the pendulum from one dangerous extreme to the other. Their “revolts against reality” could easily throw Europe into more chaos throughout the year. Mario Draghi’s answer to this frightening prospect is to devalue the currency for everyone, but the benefits will go almost entirely to big banks and big governments that refuse to reform their corrosive ways.
Thus it may be just a matter of time before the northern governments decide to revolt in turn. And then you’ll have quite the political civil war in Europe! Also, just imagine what could happen if Israel sends oil prices sky-rocketing with an attack on Iran’s nuclear facilities right around that same time. Methinks we will see interesting days ahead, my friends.
Like I said on Friday: enjoy the “calm” while it lasts!
