Belmont Club

Storm Clouds From Europe

Suppose you have X dollars outstanding on your credit card while earning Y dollars, if your debt increases and you are still earning the same Y dollars, does your credit rating go up or down? Spain may be about to find out. “Spain’s €100bn bank bailout could backfire on Madrid by destabilizing public finances and hampering the country’s access to capital markets, experts have warned.”

Open Europe, the London-based think tank, said if Spanish banks take up Brussels’ offer of €100bn in loans, Spain’s public debt would grow by around 10pc.

“If this is a victory – finally dealing with a glaring problem after four years – then we don’t want to see a defeat,” said Raoul Ruparel of Open Europe. “Spanish debt to GDP could be about to jump by 10pc in the near future and given its current path this could put Spain over 90pc debt to GDP, the level beyond which sustainability becomes questionable, much sooner than had been anticipated. This will require adjustments in its reform programme and lead to increasing market pressure.”

In other words the bond markets might penalize Spain for getting deeper into hock. Who would have known?

Now comes another promised solution. Pool European debts so that the debt will become smaller, or at least more manageable. The way out of the crisis, according to Berlin, is to create a European political union. “German Chancellor Angela Merkel is calling for countries to give up more powers to Europe ‘step by step’ as the continent tries to claw its way out of the debt crisis and says a ‘political union’ is needed as leaders prepare for a closely watched summit later this month.”

The situation, according to the Australian, is desperate. “One in four Spanish adults is out of work.” And there now a growing outcry to blame someone.

AS Europe’s leaders were wrangling last week over how to keep the eurozone intact, the normally placid town of Sabadell near Barcelona saw an outburst of revolutionary fervour.

Dozens of protesters gathered outside the home of Santiago Rodriguez, an unemployed gardener. Their aim: to stop the bank holding a mortgage on the property from evicting Rodriguez, his wife, Maricarmen, and their two small children.

On a balcony laden with laundry, children chanted: “The people, united, will never be defeated.” An adult protester yelled: “Jail the bankers!”

This is just what Brussels — and maybe Berlin — were waiting to hear. “EU officials have proposed ideas to deal with the problems of banks in the less robust countries.”

They want a Europe-wide system to guarantee bank deposits, which would discourage depositors from moving money from countries perceived as risky, and a “banking union” that would give officials more powers to oversee individual banks.

Predictably, Merkel does not like the idea – unless it is tied into a far more profound move towards centralised fiscal control across the eurozone. She certainly does not approve of the notion of “eurobonds”, allowing countries to raise debt that would be guaranteed by Europe as a whole rather than individual national treasuries.

For Merkel, none of this can be countenanced without full integration. Last week, with David Cameron at her side in Berlin, she spoke openly of a future with a directly elected European president, harmonised fiscal policies, a banking union, a unified foreign policy and political parties that straddle national boundaries.

Nobody has explained why the government regulators, who were captured by their national banking industries, won’t stay bought once the headquarters moves to Brussels. Maybe something in the air will fortify them against lobbying and influence peddling. Other countries in Europe have raised more subtle points. “Francois Hollande, the newly elected president, was caught off balance by her call for more political union in the EU and a two-speed Europe – an inner, integrated core plus an outer ring of the rest, including Britain.

“Political union in the long term is not an idea that shocks us,” said Bernard Cazeneuve, Hollande’s European affairs minister. “But if it is made a condition for intervening to relaunch growth, we risk having neither recovery, growth nor budgetary union.”

That is both yes and no, and perhaps maybe. Surely but of course, certainly and why not? “It is question of honor, is it not? A perfectly clear observation about the agony of our times.”

But leaving aside the Gallic socialist brilliance, which informs everything and illuminates nothing, how exactly is a political union going to fix Spain? Maybe it is not going to.

Perhaps the deep dark secret of the financial crisis is this. Nobody is bailing anybody out. They are simply moving the debt around like a pea under a shell, keeping just one step ahead of the crunch. Maybe this explains why, despite the trillions of dollars in disbursements, rescues, restructuring packages and bailouts, the water in the European hold is just as high as it was before. Just as high and rising. The word that David Axelrod has for the oncoming peril is European “storm clouds”. He warns that they are soon going to hit the Atlantic coast.

Obama campaign senior adviser David Axelrod claimed Mitt Romney is “living on a different planet” when it comes to the economy, brushing off attacks on President Obama’s comment at a Friday press conference that the “private sector is doing fine.”

“I think the American people are smarter than that,” Axelrod told me on “This Week” of the criticism of Obama’s remarks on the economy, which were quickly featured in Republican campaign ads. “They understand the president called the press conference to say that because of the storm clouds that are rolling in from Europe and elsewhere, we need to undergird our economy, and he called the press conference to promote several steps he thought we needed to take to strengthen job creation.”

Mark Schoeff Jr. writes, “Forces beyond his control imperil Obama … political gridlock on Capitol Hill is stalling most legislation, including measures ostensibly designed to spur the economy. Mr. Obama also is powerless to stop a potential European economic implosion, which would further slow U.S. exports and global growth.” President Obama appears to be pushing for European integration. “Mr. Obama wants European countries to inject more capital into their financial systems, deepen their collaboration on budget and banking policies, and pursue an economic growth agenda.”

Maybe this means more deficit spending, more public sector jobs, more rescues of the financial system. That’s what it has meant in the past. Will it work this time? And what if it doesn’t?

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