Posted at GoldMoney
Europe’s future
2011-DEC-31
Now
the New Year reviving old desires,
The thoughtful soul to solitude retires.
The Rubaiyat of Omar Khayyam
We are at the threshold of a New Year and accordingly
should accept Omar Khayyam’s recommendation, and as our
thoughtful souls turn to Europe we might observe two
entwined problems – economical and political. The
economic problem is that spendthrift Europeans have run
out of money, and their ability to print more is broadly
restricted to saving the banking system. The political
problem is that the whole future of the European Union
has been thrown into doubt by the debt crisis.
Starting with economics, we see European budget deficits
that are now likely to increase further as the mirage of
economic recovery fades. Furthermore, there are large
amounts of government debt maturing in the coming
months, which need to be rolled over by persuading
holders not to redeem existing bonds. According to UBS,
in the next three months eurozone sovereign funding will
total €234bn. The support from the banks is bound to be
limited, since they face their own lethal debt trap of
bank runs and maturing loan liabilities. This is the
primary reason the European Central Bank made funds
available to the banks through the long-term refinancing
operation (LTRO), not as some thought to allow the banks
to simply refinance sovereign debt.
The result is that individual governments will face a
new escalation of their funding crisis. They are already
raiding captive pension funds and other sources of
capital available to them. This will not be enough to
stave off considerably higher interest rates, with the
possibility that these higher rates might act as a
deterrent to outside lenders increasingly nervous of the
risk of default, instead of being attracted by high
returns.
We have little idea how this will play out, but it is
worth remembering that when Britain faced similar
conditions in the Seventies, interest rates increased to
double current European levels to free the funding
log-jam, and that was with the Bank of England’s freedom
to print money.
Short-term political problems arising from this serious
funding crisis become mere detail. However, we are
probably witnessing the death-throes of the European
Union in its current form, as “the project” to gradually
replace national governments and currencies has hit a
brick wall. The stark choice between massive government
spending cuts and full-scale default are likely to make
governments inward-looking and protectionist, and the
real fear for the “Eurocracy” is the eventual collapse
of the union.
The social consequences do not bear thinking about.
