Saturday, 15 May 2010

a fist full of billions

So the EU finally tried to get "ahead of the curve", and announced the mother of all bailouts -- a cool 750 bn € or so, but who is counting? Speculators, so the official line, caused the markets for sovereign debt to be dysfunctional. That is why the EU offered massive credit lines to Southern Europe, and the ECB is now buying bonds by sovereigns whose debt wasn't worth a great deal a week ago. As a quid pro quo, the countries in question - Spain, Greece, Portugal - are making a big show of tightening their belts, including wage cuts for civil servants, etc. What do we make of this?

The first thing to note is the German reaction. It is a little hard to communicate to people who only speak English that the poor, naive Klutzes in former Deutschmarkland actually believed in the "rules" -- no bailouts, the Euro as stable as the DM, etc. The FT was recently making fun of Germans being a little literal-minded. That may be true, but is hard to overstate the consequences of last week's events. In the minds of many Germans, this is the beginning of the end of the Euro, nothing less. It is not what they were promised, it was a lousy deal in which they gave up something they cherished - the DM - for little more than empty promises of budgetary probity and worthless paper bonds. The idea that there is "no alternative" (Merkel's pitch to the German public re the bailout) is not convincing anyone. I expect that some parties are going to try and make hay of this, or that the constitutional court will actually declare the bailout package illegal.

The arch-conservative FAZ, a daily newspaper that is as close to the CDU as the Times of old used to be to the Queen, just published a fictitious retrospective about the demise of the Euro, with 2010 as the turning point. Their idea - it won't take beyond 2013 to get there. Is it going to happen? Nobody can be sure, but I would say that the probability of an exit of Greece, Spain, Portugal, Italy has gone from 2% to 20% within the next 10 years within a week. Current austerity measures will make the recessions there much more painful; and before long, governments will be tired of budget cuts, strikes, and general unhappiness. The Great Depression ended when countries cut the link with gold, and the earlier they did it, the better they fared. The same will be true -- getting out of the Euro will be a god-sent for these countries, provided they can escape with their banking systems intact.

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