[Editor’s note: The following article originally appeared on February 11 on the blog Futronomics, hosted by Matt Stiles.]
As tweedle-dee and tweedle-dum capture the imaginations of only a select remaining few with their "something left to be desired" speeches, the rest of the world continues to unravel at an accelerating pace.
Over in Europe, the major leaders are doing their best to destroy what is left of the Union. I had thought that this would be a slow progression. But at the rate the rhetoric is picking up, I doubt the EU or the EMU make it through the summer. Consider the following:
Europe Ambushes Germany on Debt Bail-Out
EU finance ministers are to discuss proposals over breakfast in Brussels today for some form of "debt-agency" or mechanism for the EU to raise bonds, a move seen by diplomats as a ploy to ambush Germany into accepting shared responsibility for EU debts – anathema to Berlin.
Concern is mounting over the dramatic deterioration of public finances across the EU. Ireland's deficit is heading for 12pc of GDP, and there are doubts over whether Italy and Greece can roll over some €250bn (£218bn) in state debt between them this year.
EU company debt is a worry too, now 95pc of GDP compared to 50pc in the US. "The amount of debt to roll over in the eurozone is huge, at a time when banks are tightening credit standards," said Gilles Moec, from Bank of America. "Spanish businesses are in a dire situation."
The amount of vital information packed into these three paragraphs is about equivalent to what you would read in an entire issue of the Wall Street Journal. Indeed, Germans are becoming increasingly annoyed with calls, rather demands, for Germany to shoulder the burden of Southern Europe's debt binge of the last 10 years.
Germany is not immune to feeling the squeeze of the global depression. Industrial production fell 4.6% in December compared to a year earlier. Announcements of layoffs and reduced work hours are daily occurrences here as well. Volkswagen recently cut work hours for 86,000 employees. German workers who are losing their jobs or having their wages cut are not taking kindly to requests from Spain or Ireland to fork over billions.
It was never supposed to happen this way. The strong nations were always assumed to be able to help the weak. The entire blueprint of the EU was drawn up with the same principles as models for the U.S. economy. It was assumed to be at equilibrium before making assumptions as to what would occur in the event of isolated problems. A complete collapse of all markets simultaneously was never incorporated into the model. Now that it is happening, is it any wonder that the individual nations revert to finger-pointing and protectionism?
A very apt blog post by Bruno Waterfield at the Daily Telegraph highlights this accelerating devolution. From the post:
Intensive, even frantic, talks are going on behind the scenes to keep the lid on the political fall out from the economic meltdown.
The European Commission and Czech EU presidency, they took it over from France on Jan 1 (it hasn't been easy, see here and here), have announced an emergency summit for the end of February.
The emergency? Nicolas Sarkozy.
The French president's threat (made in Munich, where there are bad memories for the Czechs) to call a crisis meeting of the eurozone countries in Paris has set the cat amongst the pigeons.
It is not his job for starters.
But he has made little secret of his desire to run the show and has treated the Czech EU presidency, who are supposed to be in charge, with true old Europe patrician contempt for "parvenu" East European members of the club.
Sarkozy is rapidly turning into a thorn in the side of anything non-francophone. His rhetoric is angering not only the Czechs, but everyone. Recent comments will ring a familiar tone to Canadians worried about provocative statements from the new Obama administration about a "Buy American" push.
To recap, Mr Sarkozy last week pointedly referred to a Peugeot-Citroen plant in the Czech Republic to say that planned French government aid to automakers would be on the condition that all cars would be "Made in France".
This is what he said: "If you build a Renault plant in India to sell Renaults to Indians, that's justified, but if you build a factory, without saying the company's name, in the Czech Republic to sell cars in France, that's not justified".
Like it or not, that is what the EU's single market is all about. Is Mr Sarkozy now against it? Question that and then what is left for the EU?
...
Prague is furious.
Mirek Topolanek, the usually unflappable Czech PM, has lashed out by warning Mr Sarkozy that the Lisbon Treaty, much beloved in Paris and Berlin, might be a casualty.
"If someone wanted to really jeopardise the ratification of the Lisbon Treaty, he could not have chosen a better way and a better time," he snarled on Monday.
A Czech statement: "As the Prime Minister of the Czech Republic I do not understand the argument that it is unjustifiable to manufacture cars for the French market in the Czech Republic. The attempts to use the financial crisis to introduce such forms of protectionism and protective measures may slow down and threaten the revival of the European economy".
All bets appear to be off. Europe is disintegrating into the same protectionist tendencies that accompanied every other economic slump.
How people actually believed that Europe was going to keep on chugging along while the U.S. and the Dollar gradually waned to irrelevance is beyond me. The talk of the Euro overtaking the U.S. Dollar as reserve currency of the world never made any sense. Yet that didn't stop a number of well-known analysts to tout Europe's "relative safety" as grounds for buying stocks or the Euro itself. Now the truth has been revealed. The problems in Europe are every bit as dire as those in the U.S. And that cannot be stressed any better than yet one more article from the Telegraph:
European Banks May Need 16.3 Trillion Pound ($24 Trillion USD) Bailout, EC Document Warns
No that is not a typo. That is Trillion with a capital "T".
A secret 17-page paper discussed by finance ministers, including the Chancellor Alistair Darling on Tuesday, also warned that government attempts to buy up or underwrite such assets could plunge the European Union into a deeper crisis.
National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors - particularly those who lend money to European governments - have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.
“Estimates of total expected asset write-downs suggest that the budgetary costs – actual and contingent - of asset relief could be very large both in absolute terms and relative to GDP in member states,” the EC document, seen by The Daily Telegraph, cautioned.“
"It is essential that government support through asset relief should not be on a scale that raises concern about over-indebtedness or financing problems.”
Sadly, these are the types of numbers that are somewhat reflective of reality in both Europe and the U.S. - although the only way for people to be exposed to an inkling of the truth is via "leaked documents." However, these numbers are only reflective of the current state of affairs. They do not take into account any further deterioration in asset prices - something that is sure to happen as job losses accumulate and rising inventories of nearly everything forces further liquidation. Back to the article:
European Commission officials have estimated that “impaired assets” may amount to 44pc of EU bank balance sheets. The Commission estimates that so-called financial instruments in the ‘trading book’ total £12.3 trillion (13.7 trillion euros), equivalent to about 33pc of EU bank balance sheets.
In addition, so-called 'available for sale instruments' worth £4trillion (4.5 trillion euros), or 11pc of balance sheets, are also added by the Commission to arrive at the headline figure of £16.3 trillion.
Banks account for their assets in different ways. Assets put into the “trading book” have to be marked to current market values, while those in the “banking book” are loans and other assets which the institution believes it can hold to maturity. Other assets are classified as “available for sale”, which are also marked to market values.
Again, this isn't just the reality in Europe. A similar amount of bank assets are impaired in the U.S. Japan and the rest of the world could probably claim the same amount or more. Yet an admission to that has not been forthcoming. Banks continue to proclaim that they can hold their debts to maturity and retain 100% of their value. But debtors are defaulting on these assets at a rapidly increasing pace. There is no credibility to the claims.
The Commission figure is significant because of the role EU officials will play in devising rules to evaluate “toxic” bank assets later this month. New moves to bail out banks will be discussed at an emergency EU summit at the end of February. The EU is deeply worried at widening spreads on bonds sold by different European countries.
In line with the risk, and the weak performance of some EU economies compared to others, investors are demanding increasingly higher interest to lend to countries such as Italy instead of Germany. Ministers and officials fear that the process could lead to vicious spiral that threatens to tear both the euro and the EU apart.
“Such considerations are particularly important in the current context of widening budget deficits, rising public debt levels and challenges in sovereign bond issuance,” the EC paper warned.
We're getting closer to another "point of recognition." The deflationary impact of this realization should make it clear to most that a reinflation attempt by central banks or governments ain't gonna work.
This article was written by a member of the Stockhouse community.
Read more Stockhouse articles by Matt Stiles.
To read more work by Matt Stiles, visit the blog Futronomics.
