Milking the currency dry
It all started in Athens.When homo erectus eventually became sapiens the inhabited world of North Africa, the Middle East and finally Europe developed. The first really successful recognizably 'modern' attempts of tribes to organize themselves resulted in the City state of Athens ultimately becoming the indelible Greek civilization whose achievements endure 4,000 years later. This in turn spurned rival, successive empires such as Rome while tribes of Celts, Angles, Saxons, Franks, Nordics and innumerable others divided the post-Moorish invasion map of Europe into a few empires and a few hundred kingdoms, city states and principalities. Many of these gradually formed strategic, trade or military associations and affiliations that, following the European turmoil of the age of democratic enlightenment, Napoleonic conquest and various revolutions spawned the nation states whose inability to recognize each other's place in the new industrial world resulted in World War I. The European map was then redrawn by the various European, American and Asian victors (Australasian forces were important in the military victory but shoulder little if any responsibility for the settlement) in a way that was never going to be acceptable to the vanquished. Resentment whipped up during The Great Depression saw a second global conflagration break out in Europe in 1939. Since 1945, these still young and in some cases nascent republics, along with the few remaining kingdoms, have been trying to find ways to live in harmony. The EU project was always about developing common trade interests into a harmonious Euroland where somehow different tribes, histories, traditions, beliefs, languages, cultures and religions would all rally behind the flag (you know the one with the stars on it) and common interests would outweigh mutual differences and mistrust.Hence - The Euro. A project that really began with the Trojan horse of the ECU (a notional barmy currency unit that was replaced by a real barmy one). Britain had been in the ECU until Britain and Germany's respective finance ministers had a playground spat about who could have whom in a fight (does everyone remember Norman/Norma Lamont) and soon Britain was excluded in a kind of a "you're fired"
"you can't fire me, I quit!"
"you can't quit, you're fired"
Etc, etc, etc etc kind of a way.
The pure fantasy rules that made it too hard for Britain to achieve ECU criteria without having interest rates of 20% obviously had to be ignored to allow the likes of Greece, Spain, Ireland, Italy, Portugal, Belgium, Netherlands, France or even Germany qualify for this barmy club - shadows of the famous comments by Marx [admittedly it was Groucho not Karl] about not wanting to be a member of any club that would have me.
The bigger the disparity between economic reality in a country and the nonsensical euro qualifying rules, the bigger the whoppers that had to be told to be wallowed in. Greece's legendarily dysfunctional economy therefore had to lie the most - a line drawn in the sand today by the French President Nicholas Clouseau, who now thinks that believing those lies, kindly sponsored at the time by Goldman Sachs, was a mistake. Presumably everyone else's creative accounting of the time is acceptable to 'le petit President' who shares at least a couple of echoes of the Napoleonic tradition; he is very short in stature and is the subject of rumours that he also is far too busy with European crises to father his wife's children.
Anyway, a little over 10 years ago, the Euro came into being - it couldn't be called ECU because in German 'Ein ECU' sounds very similar to saying 'a cow'.It allowed the wealthy core nations to lend ridiculous amounts to the weaker developing nations for those aspirational weaker nations to spend on branded luxury goods manufactured by the wealthy nations - a vendor finance virtuous circle that made everyone feel good...until it became starkly apparent that the GIPSI nations couldn't afford to repay. This had never been envisaged. Greek default would be of a manageable size. Greek, Irish, Portuguese and Spanish could perhaps be contained by raising a trillion Euros. However, Italy, Belgium, Austria and Netherlands exposure to the contagion means that the EU and Switzerland would need to raise an unprecedented amount- McKinsey estimate Euro 4-5 trillion of capital - not mere liquidity but permanent capital.
So what did this weeks Euro summit achieve? It agreed that the Euro 400 billion or so borrowed to create the EFSF could be used as security so that a trillion Euros could be leant to protect banks who would now write off half of Greek debt. So assuming that Greece can pay back the other half and that no other Euro zone country defaults or writes down its debt that just leaves the European banking system to repay the 1 trillion of borrowings which of course it could do if it raised its share probably the best part of 3 trillion Euros) of the total European banking sector capital shortfall. There are 3 ways to achieve this:
1) Print 3-4 trillion Euros tomorrow and bail the banks. This would reduce the perception of the Euro to basket currency status, potentially spark stagflation but ultimately lead to a position where debts could be written off and the Euro zone could grow again. Germany is unlikely to accept this, scarred by similar memories from Weimar days.
2) Face reality, write off bad debts, discard the Euro and close sitting duck banks like SocGen, BNP-Paribas, Deutsche, Commerzbank etc. Stock and property markets would collapse, unemployment would soar, social unrest would run wild but within a few years a healthy functioning Eurozone economy would achieve its full potential.
3) Pray for a miracle
4) Just keep putting it off in the hope that something turns up. This approach also involves large doses of 3) above.
European policy makers have chosen option 4 interspersed with liberal doses of option 3.And the markets liked it because it was their preferred option too.Now watch the governments go and pull more wool over the eyes of pathetically grateful voters who would rather happy buy into it the fantasy rather than face their own worst nightmares. You can put lipstick on a cow but it's still a cow - or maybe in this case a pig's ear..