Belmont Club

In the year our lord

As the story of the financial crisis continues to grip American publics, it’s interesting to look at how the Europeans are faring. The short answer is poorly. The Associated Press reports that some European countries, already in a bad way, are sliding off the cliff. The problem is that 2009, in which it was hoped things would get better, may bring even more bad news. The stresses are so great, according to the NYT, that the weaker economies may face a choice between survival and staying in the European union.  The AP reports that:

With exports and industrial production falling off a cliff and the banks, particularly in Britain, embroiled in a battle for survival, the prospects for 2009 — when some once thought a turnaround might start — are simply looking grimmer and grimmer. And Europe’s people know it, with rioting and civil disturbances on the rise and Iceland’s government falling victim in part to public anger over the financial crisis.

Latvia, Lithuania and Bulgaria have suffered street clashes amid a toxic brew of sagging economies and local concerns in recent days. In Greece, Athens was rocked again Thursday by another riot following a protest against an attack on a trade unionist. …

So far, Europe’s major economies have escaped unrest, but the European Commission has indicated that it is keeping a close eye on developments. The International Monetary Fund’s managing director Dominque Strauss-Kahn of France told the BBC earlier this week that more unrest could occur almost anywhere. “It can be in my own country (France), it can be in U.K., it can be Germany, it can be in eastern Europe,” he said. …

“Adjustment in the overvalued euro economies (Italy grossly, Spain moderately) will be much more painful, and Italy’s possible exit from the euro augurs for years of crisis,” said Charles Dumas, an analyst at Lombard Street Research.

Most interestingly, the Daily Telegraph quotes a Societe General strategist’s accusation that the failing British economy was like a Ponzi Scheme, without even the excuse of a subprime meltdown to blame for its self-inflicted woes.

NYT article stresses the effect that the crisis is having on the cohesiveness of the EU. Put bluntly, unless things start looking up soon, the stresses will only continue.

“The Italians, the Spaniards, the Greeks, we all have been living in happy land, spending what we did not have,” said George Economou, a Greek shipping magnate, contemplating his country’s economic troubles and others’ from his spacious boardroom. “It was a fantasy world.”

For some of the countries on the periphery of the 16-member euro currency zone — Greece, Ireland, Italy, Portugal and Spain — this debt-fired dream of endless consumption has turned into the rudest of nightmares, raising the risk that a euro country may be forced to declare bankruptcy or abandon the currency.

Neither article is talking about the obvious questions: to what extent is the current crisis rooted in institutional failure and what kinds of institutional changes are now not only desirable, but perhaps inevitable. The one thing that hasn’t changed in the months since the financial crisis is the confidence of Western political leaders to craft a solution; whether this consists of various ‘stimulus’ packages or more evanescent invocations of Hope and Change. One thing that hasn’t been mention is whether they are part of the problem.

If the crisis deepens, certain sections of the public may begin to lose confidence in their leaders — who may suffer a crisis of legitimacy in much the way Wall Street financiers already have. This crisis will have to be resolved in some way, ultimately involving a constitutional or electoral process. The politicians may ride it out if the bronco quits bucking. If he keeps going it will be tough to hang on. But the problem is that there is no analytic way of predicting when the crisis will ease. Therefore expressions of hope that 2009 will be the year of recover are just that: Hope. And while all of us would be delighted to hit the jackpot in Lotto, nobody can go through life counting on it. It’s reasonable to surmise that if the economic crisis keeps going, unpredictable political change will be upon us, for good or for ill.

Just exactly what happens if the numbers don’t all line up for Europe over the next few months is anybody’s guess. And just as Europe’s weaker economies are the hardest hit, countries which are dependent on oil exports and Third World societies of all kinds will not only be hurting, they will be desperate. The next 12 years promise to be interesting. Prosperous, maybe not. Interesting for sure.

Even Britain, accounted one of the more prosperous economies is facing unprecedented hard times.  The Daily Telegraph reports government warnings hat:

Families must brace themselves for a slump of far greater severity and longevity than the recessions of the 1980s and 1990s, they warned. They said the current crisis will be of a scale to rival the biggest peace-time crisis in modern history — the Great Depression. The warning was delivered by economists and politicians after the Office for National Statistics revealed that the economy shrank by 1.5 per cent in the final three months of 2008 alone. …

Albert Edwards, a strategist at Société Générale, likened the British economy to a Ponzi scheme — a fraudulent debt mountain like that allegedly used by the New York hedge fund manager Bernard Madoff.

“What I find amazing is that people aren’t really nailing Gordon Brown and [Bank of England Governor] Mervyn King for this,” he said. “At least in the US they had the excuse of the arrival of sub-prime — a new sector of the market. We didn’t really have anything similar but we ended up with a bigger national Ponzi scheme than the US.”

What exactly does Ponzi Scheme Albert Edwards refers to consist of? Could it be that the Welfare State itself, combined with falling birthrates essentially meets the criteria of an intergenerational pyramid scam? Well let’s see if we wind up, as has been darkly suggested, in the Great Depression Part 2.