Belmont Club

Always Look on the Bright Side of Life

Fears that Portugal and fatally Spain may need to be bailed out after getting into deep debts have led some leading European countries to question whether the Euro can be saved by successive lending packages to the struggling states. “Germany, whose leaders have expressed frustration at the market backlash against their plans to solve the euro zone’s debt problems, does not want to make the stability fund larger.”

The Euro briefly ticked up on reports that Washington was going to pick up the slack. “U.S. Treasurys’ prices fell and the euro strengthened against the dollar on Wednesday after the news that the United States would be prepared to support an enlarged EFSF.” The US signaled it “would be ready to support the extension of the European Financial Stability Facility via an extra commitment of money from the International Monetary Fund, a U.S. official told Reuters on Wednesday.” But European relief was short lived.

The Euro’s boost didn’t last long after the traders learned more details of the US “rescue”. It turned out that all the US was saying is it didn’t mind if more money were put into the bailout fund, but didn’t say it would kick in the dough.

Win Thin, global head Of emerging markets strategy at Brown Brothers Harriman in New York, said upon close reflection, the story lacked “substance.”

“If we are reading the comments correctly, the U.S. official was simply saying that the U.S. would back an extra commitment of funds from the IMF for Europe, not that the U.S. would give more money to the IMF for use in supporting Europe,” Thin said.

The cavalry didn’t come this time. The question is whether it ever will. Even as the European Central bank announced more measures to investors from raising the interest on bonds held by other community members, the New York Times noted that the spotlight has moved on from Portugal and Spain to Belgium and Italy.

Inexorably the line is lengthening. Greece, Ireland, Portugal, Spain, Belgium, Italy.

“But even as concern mounts that Portugal and possibly Spain may seek financial aid after Greece and Ireland requested bailouts, investors have started asking whether those two economies may be the next weak links in Europe’s monetary union, the euro … driving Italy’s borrowing costs to near-record highs,” as did Belgium’s, hitting a 10 year peak.

“Italy cannot fail — that would be the end of the euro zone,” said Daniel Gros, the head of the Center for European Policy Studies in Brussels. “Everything and anything that would be needed to save Italy would be done.”

But who says Italy can’t fail?  Is it too big to fail? Will something be different the next time this week? Spain is lightening ship as much as their socialist government dares to. “Mr. Zapatero said the state would sell stakes in several assets, eliminate an unemployment benefit and create incentives for small and midsize businesses.” It hopes to sell the lottery and its management of Spain’s airports. And it will tighten its belt. It will only borrow 6% of the GDP next year, compared to a figure almost double that number today.

Mr. Zapatero has pledged to cut Spain’s budget deficit to 6 percent of G.D.P. next year from 11.1 percent last year. The government insists that it will meet its 9.3 percent goal for the year after cutting its central government deficit almost in half in the first 10 months with spending cuts.

The bad news is that the Spanish ship of state is still sinking. The good news is that it is only sinking half as fast. Maybe if they sell off more, cut more …. but austerity is not going down well with European voters, especially the Left. “Thousands of Italians marched in Rome in a rally organised by the FIOM metalworkers union and backed by the CGIL, Italy’s biggest union with 6 million members, to protest the bleak outlook for jobs and demand more rights for workers.” All over the continent, protesters demanded that the spending continue. It has been going on for so long it hardly seems possible that the music is finally stopping.

Nov. 30 – Thousands of students streamed through Rome towards parliament, chanting and waving banners with slogans such as ‘education is on its knees’. Students, who on Nov. 25 occupied key tourist sites including the leaning tower of Pisa and the Colosseum, vowed to block proposed changes by Education Minister Mariastella Gelmini.

A 24-hour strike by workers on London’s underground rail system disrupted much of the network. The strike forced millions of commuters to struggle to work in their third walkout since September in a dispute over 800 planned job cuts. Another 24-hour strike took place on Nov. 28.

Oct 3 – A 24-hour strike by workers on London’s underground rail system disrupted much of the network. The strike forced millions of commuters to struggle to work in their third walkout since September in a dispute over 800 planned job cuts. Another 24-hour strike took place on Nov. 28.

Oct. 19 – Britain’s trade unions took protests over spending cuts to parliament, promising to fight to protect public services.

Nov. 10 – About 55,000 students took part in a demonstration in London against the government plans to triple university tuition fees up to 9,000 pounds ($14,000). A small group took part in protests at Millbank Tower, home to the Conservative Party headquarters, which saw windows smashed and missiles hurled at police. Around 66 people were arrested. …

Nov. 27 – Thousands of Irish took to the streets of Dublin to protest against the looming bailout. The EU approved an 85 billion euro ($115 billion) rescue for Ireland, a day later.

Keep the party going, say the protesters.  The problem is the munchies are gone and the beer kegs are tapped out. And the power man is waiting outside to disconnect the light. The music can’t play for much longer.  The National Post describes the descent of the Welfare State into bankruptcy using Portugal as a case study. In the long tradition of European societies, it defined its citizen’s rights not in terms of what government could not do to them, but of what government promised to give them.

Most critical among these acts was the 1976 constitution that established Portugal as a modern democracy. Its preamble affirmed the necessity of “opening a path to a socialist society,” while entrenching the nationalizations undertaken after the revolution. Labour was constitutionally empowered, buttressing existing laws that make it extremely onerous to dismiss full-time workers.

Citizens were additionally granted a multitude of social and economic rights, including the right to work, housing, education, culture, health, and social security. These provisions were heeded by Portugal’s political classes, as the state apparatus progressively grew to fulfill the newly assumed constitutional obligations. Prior to the 1974 revolution, the government spent about 20% of GDP, mostly on the traditional functions of military defence, domestic administration, and infrastructure. Since then, driven by social expenditures, the weight of government has risen to 46% of GDP, higher than the European average. Over the same period, the number of public-sector workers quadrupled.

The goodies were supposed to go on forever because they were promised to the people by right. Promising these “positive rights” to the citizenry was long regarded as the hallmark of enlightened government, especially by those who admired Europe and felt that the American-style Bill of Rights, essentially limiting government, was a relic of the Dark Ages. They were “first generation” rights, already superseded by a Europe marching forward to the beat of the Ode to Joy.

Rights considered negative rights may include civil and political rights such as freedom of speech, private property, freedom from violent crime, freedom of worship, habeas corpus, a fair trial, freedom from slavery and the right to bear arms. Rights considered positive rights, as initially proposed in 1979 by the Czech jurist Karel Vasak, may include other civil and political rights such as police protection of person and property and the right to counsel, as well as economic, social and cultural rights such as public education, health care, social security, and a minimum standard of living. In the “three generations” account of human rights, negative rights are often associated with the first generation of rights, while positive rights are associated with the second and third generations.

Obama advisor Cass Sunstein, for example, was advocating taking up the “Second Bill of Rights” which FDR put forward in January, 1944. These were very much like the “positive rights” which the Europeans enshrined in their social compacts. Among these were:

  • The right to a useful and remunerative job in the industries or shops or farms or mines of the nation
  • The right to earn enough to provide adequate food and clothing and recreation
  • The right of every farmer to raise and sell his products at a return which will give him and his family a decent living
  • The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad
  • The right of every family to a decent home
  • The right to adequate medical care and the opportunity to achieve and enjoy good health;
  • The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment
  • The right to a good education

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This meant minimum wages, regulated industries, farm subsidies, government regulation, subprime mortgages, public health care, social security and public schools. In a word it meant Europe. For years Europe’s admirers tirelessly nudged America down the road to the Dream. Now, with an American imitation so close to construction,  Obama’s supporters look on aghast as the residents of the Old Continent jump out the windows and bolt out the doors of their enchanted castle, which Obama’s admirers had so long dreamed of entering.

Why are the inmates bolting? The uproar caused by the collision between the immovable force of positive rights and the irresistible object of bankruptcy. Europeans are demanding their “rights” and while their governments are tying to find the right words to say, “we’re broke”.  But it is being spoken in a whisper. The European leaders are probably afraid of what happens if the party crowd finds out that the stash is truly, truly gone. Finito. Acabado. Kaput. That the enchanted castle is mortgaged to the hilt; that the repo man is right outside the door. The Euro crisis isn’t just the crisis of a single currency. It is reality’s referendum on the Welfare State project. The real significance of a collapse in Spain or Italy isn’t simply that it means the end of the Euro, but that it signifies the end of a lie. You just can’t write a check that you can’t cash.

No Way In is now out at