Belmont Club

Borrowed Time

With the sovereign debt crisis now spreading to Italy, European leaders are looking for ways to insure the continent’s third largest economy against default and extend similar protection to banks, which are sure to be pulled down if one or several European countries fail to service their deut obligations. A Council of Foreign Relations article itemizes the growing dangers:

The sovereign debt crisis has begun to infect Italy, the eurozone’s third largest economy. And as the contagion spreads from Greece to the core of the single currency union, it has endangered many French banks that hold large quantities of Italian and Greek government bonds. This has put other exposed continental banks–and U.S. financial institutions– at risk, feeding investor unease throughout global markets.

But the Daily Telegraph reports little confidence in the proposed solutions because they lack the one thing necessary to make any solution work: money. The only conceivable source of additional money, Germany, has failed to provide any guarantee that it will ante up the necessary sums.

That sent Angela Merkel to the German parliament in order to get the authorization to write a bigger check. The odds are that she will get it.

Robert Preston of the BBC says that given the EU’s depleted bailout kitty, there will be barely enough money to keep the wastrels afloat for more than year. Eventually, the European Central Bank will have to print money to keep the EU going.

This is what France – backed by the UK – wanted. And it would have been the “comprehensive and ambitious response” promised by Mr Sarkozy and Mrs Merkel.

The point is that there is no limit to what the ECB can lend, because (to state the bloomin’ obvious) it can create money at will. Deploying the ECB in this way would have been the big bazooka that the British prime minister has been requesting.

But for German politicians, sanctioning the ECB to lend directly to governments would have been the slippery slope to debasement of the euro (there’s hyperinflationary history haunting them here).

This leaves Germany with the choice of either letting the ECB print money or kicking in more money to square the accounts. But neither solution is likely to last. A number of EU member countries are mired in systemic deficits, spending more than they are earning. Since they can’t stop spending, sooner or later the debt crisis will re-emerge. That much is clear. But tomorrow is another day and maybe something — like a diamond asteroid hitting the earth — may turn up.

Nigel Farage of the UK Independence Party appears to believe that Eurocrats have no other strategy but to play for time and amass as much power in Brussels as possible in the process. On the face of it such a strategy would be completely insane. Maybe it is, and the only thing that makes observers believe there is a method to madness is the belief that no one could be that crazy


David Smick at the Weekly Standard also noticed the lemming-like response of political ‘leaders’ towards the debt crisis. He characterizes this zombie-like marching toward the cliff as “learned helplessness”. It is a kind of fatalistic shell shock. Smick writes, “the financial news is so relentlessly terrible that people have become numb to it and assume nothing can be done to regain control over our fate.”

Its psychological driver is the sudden feeling of helplessness brought about by the collapse in faith in all the nostrums in which their confidence was formerly reposed. “A year ago, senior European officials never dreamed they’d be in their current mess. Greece represents only 3 percent of the Eurozone economy. Bailout tricks and clever central bank interventions were supposed to calm nervous markets. That happened, but didn’t last. A powerful global financial market brought officials to their knees.”

Even though the Eurocrats are talking about the “big bazooka” there are probably few of them who actually believe it can actually stop the monster from advancing on them. They have been cut down to size by reality and yet must play the part of confident sovereigns simply because yielding to their instincts now would manifest what they really feel — a rising sense of panic. They’ve woken up only to realize, looking at the mirror, that they are frauds and have always been frauds.

Maybe Smick is right, but then if he is the global elites are in a world of pain. His article is subtitled “the global debt apocalypse approaches” and that probably says it all. He believes excess debt is suffocating the world economy. Since all the solutions proffered by “world leaders” feature increasing the debt load then the responses to the crisis are essentially prescriptions for suicide. The Europeans are trying to brazen it out, but the game is up and they have only themselves to blame.

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