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Generational Dynamics Web Log for 30-Apr-2010
30-Apr-10 News -- Politicians assign blame as euro crisis deepens

Web Log - April, 2010

30-Apr-10 News -- Politicians assign blame as euro crisis deepens

Greek public sectors unions plan big May Day demonstrations on Saturday.

German Chancellor Angela Merkel's complacency turns to panic

That was the headline for Thurday's EuroIntelligence briefing, which began as follows:

"Angela Merkel’s extraordinary complacency abruptly ended yesterday, when the chiefs of the IMF and the ECB persuaded her that further procrastination would add dramatically to the cost of the crisis, and that the future of the eurozone was now at stake. But it might have been too late as the crisis dramatically spread to Spain, and engulfed large part of the southern European banking sector."

Grim-faced Angela Merkel under the headline, "Fear about the euro crisis grows." The red line is a graph of the euro versus the dollar, on the front page of German newspaper Potsdamer Neueste Nachrichten <font face=Arial size=-2>(Source: Guardian)</font>

Grim-faced Angela Merkel under the headline, "Fear about the euro crisis grows." The red line is a graph of the euro versus the dollar, on the front page of German newspaper Potsdamer Neueste Nachrichten (Source: Guardian)

In fact, Angela Merkel is getting a great deal of blame for her apparent flip-flop on the issue. Merkel originally insisted that Greece would only receive money "as a last resort," and that was when Germany's share was going to be only 8.4 billion euros. But now that the total bailout has tripled, to 135 billion euros over 3 years, German's share is now 25 billion euros. Merkel's political opponents are claiming that she ensured that a "last resort" would come to pass, according to FT.

The German people have been opposed to aiding Greece from the beginning, and now that the amount of aid has tripled, opposition has increased. German newspapers are whipping up an anti-Greece fury, according to the Guardian. The headline on the tabloid Bild says, "The Greeks want even more of our billions! Will Greece become a bottomless pit for German taxpayers?"

Reuters quotes the conservative newspaper Frankfurter Allgemeine Zeitung as saying,

"Whoever thinks the Greece crisis is a currency or financial problem, is coming up far too short, and could therefore end up falling into an abyss. It's not just about a country which cheated its way into economic and monetary union (which everyone knew) and now can't live with it. The risk of chain reaction caused by the markets which could hit Portugal, Spain, Italy or Ireland...is not the biggest danger on the horizon. This is ultimately about the whole of the project "Europe". This is already obvious from talk about advantages and disadvantages of a country exiting or being thrown out of the euro area."

The choice of words -- "complacency turning to panic" -- is interesting because that's the Generational Dynamics paradigm for what happens during generational Crisis eras. The survivors of a crisis war (like WW II) are very cognizant of the dangers, and they create austere rules and institutions to prevent any recurrence. The younger generations born after the crisis war (like our Boomers and Generation-Xers) rebel against the austere rules and become complacent about the dangers. Then, when an emergency occurs during a Crisis era, these younger people turn from complacency to panic, and often over-react.

Another tense weekend

European officials are now meeting to come up with a commitment to aid Greece, by loaning Greece 130 billion euros at low interest rates over a three year period.

This will require agreement by the German Bundestag (parliament), and there will also be court challenges. But now that complacency has turned to panic, there is an urgent desire to get a agreement signed over the weekend.

As I understand the press reports, Merkel expects to get the necessary German law passed in the same way that President Obama got his health care bill passed. Merkel plans to use her governing coalition to force a favorable vote in the Bundestag, irrespective of the opposition of the German people.

There is also a possible compromise scenario. Greece has to make an 11 billion euro payment on its debt on May 19. If EU officials cannot get the full 130 billion euro bailout passed, then they might simply provide an 11 billion euro bailout, and then start the negotiating process all over again after May 19.

The Nuclear Option

But what if no agreement can be reached at all? Above we mentioned the possibility of an over-reaction, and this would be it.

Even if an agreement is reached on a bailout of Greece, there still remain the problems of Portugal and Spain. Both of these countries have had their debt ratings lowered, although not to the level of junk status that Greece's debt occupies.

When you take into account all of the PIIGS countries (Portugal, Italy, Ireland, Greece and Spain), a total of 600 billion euros in aid would be required, according to Bloomberg.

This brings us to the "nuclear option." Stated simply, the European Central Bank would "print" 600 billion euros, creating new money, and then use the money to purchase bonds at nominal value from all the PIIGS countries.

The article points out that there are plenty of political and legal obstacles to such a proposal. But Ambrose Evans-Pritchard, writing in the Telegraph, says that although this option would be prohibited by existing treaties in normal times, the ECB can buy unlimited quantities of assets in times of systemic crisis.

A proponent of the nuclear option is Jacques Cailloux, the chief Europe economist at the Royal Bank of Scotland.

The article quotes him as follows:

"We have gone past the point of no return. There is a complete loss of confidence. The bond markets are in disintegration and it is getting worse every day.

The ECB has been side-lined in the Greek crisis so far but do you allow a bond crash in your region if you are the lender-of-last resort? They may have to act as contagion spreads to larger countries such as Italy. We started to see the first glimpse of that today, [referring to Portugal and Spain].

This feels like the banking crisis in late 2008 post-Lehman, though it has not yet spread to other asset classes. The ECB will have to act it if does."

The nuclear option would be a world-changing event. It would inflate and weaken the euro currency, and would effectively be a devaluation. However, the dollar would be considerably strengthened, as investors fled to the dollar for safety.

Additional links

Greek's leftist public unions are planning a major May Day demonstration on Saturday. AP

Merkel isn't the only one being blamed for the euro crisis. Some people blame the speculators Spiegel, while other people blame the American ratings agencies Spiegel.

Ratings agencies are still making huge amounts of money in fees and commissions on the collateralized debt obligations (CDOs) that they originally rated AAA, before they turned into "toxic assets." Regular fee payments were built into the original deals, irrespective of the accuracy of the ratings. Financial Times

Neil Barofsky, head of the Administrations SIGTARP program, is criticizing Treasury Secretary Timothy F. Geithner for his role in the AIG bailout in 2008. Bloomberg

Al-Qaeda in Iraq is running short of suicide bombers. AFP

A major confrontation between Islamist extremists and the Pakistan army is looming in the tribal areas of North Waziristan. Asia Times

Belgium's lower house of parliament has voted overwhelmingly to ban all clothing that covers or partially covers the face, effectively banning the Islamic Burqa. Deutsche Welle

(Comments: For reader comments, questions and discussion, see the 30-Apr-10 News -- Politicians assign blame as euro crisis deepens thread of the Generational Dynamics forum. Comments may be posted anonymously.) (30-Apr-2010) Permanent Link
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