greek elections European crisis

The latest European plan is obviously an expression of the EU to deal with the Financial Crisis – or rather the plethora of unresolved problems in the wake of October 2008. There is clearly a European determination not to end up like Japan with a zombie economy for the next 20 years.

Clearly the European taxpayers are not just going to pay up and leave the banks to continue their merry way. Before public money is going in to recapitalize the banks – the shareholders will have to take all the losses possible. It is not going to be like Japan where the government just took over the bad debt and financed them with sovereign bonds.

The politics of the EU now stands more clearly: The EU seem resolved to separate the economic questions of growth from the problems of a financial sector in ruins. The real economy is clearly not going to resolve the financial problems because:

1)      The economies in general are too weak and facing varying years of very little growth or even negative growth.

2)      The financial problems are so grave, that even a healthy economy going at full tilt cannot within the foreseeable future pay off the losses hidden in the banks.

Thus the primary task is to disentangle the economic and the financial problems from one another.

The Stability Pact lays down the perspectives for the economy with a view to a stable environment of growth. Before this can be achieved there must be introduced various reforms in the various EU countries. Reforms addressing the pension and demographic problems, the problems concerning a overly emphasis on the public sector, problems of shifting the private sector into viable industries (tourist trade in Greece is obviously not future orientated the way they have treated German tourists).

Make no mistake about it: It will leave the citizens of the different countries with different levels of affluence. Finance Minister Schäuble should have made that perspective clear to even reasonably dim wits: The German wages are about to grow probably just shy of 6% – even risking a notch or two of inflation. Inflation is far from a given thing in Germany as the vastly greater productivity will leave unemployment a problem of less efficient EU member states.

If the rest of Europe won’t cut their wages they will have to cut employment until they can sell on the German market. Since the Euro this adaptation cannot take the form of all others debasing their currency to make their products sellable on the German market. The alternative is to make the German standard of living better. Other European producers will have to cut their prices to enter the German market.

The ghost of deflation looms, so higher than average German pay raises will be kept in check by lower prices.

Where does Greece fit into this: It doesn’t!

Jörg Asmussen from the ECB makes this clear beyond any doubt in this article(for all German readers):

Either the Greeks comply with what they agreed to or they will leave the Euro. The investors and others have taken the losses they are going to take. If the Greeks won’t climb out of the toilet and enjoy the smell, they will be flushed.

Having agreed upon the Stability Pact the different countries will have to introduce very unpleasant reforms. Hollande in France will have to excel in the noble political sport of running from campaign promises – as has Thorning-Schmidt in Denmark.

It is also increasingly clear that the financial sector will not be allowed to hamstring this transformation. This leaves Britain in a very uncomfortable place, as 30% of their GDP comes from the financial sector, but if you think you can get away with abusing a currency that Germany (and France for that matter) is involved with, you couldn’t be more wrong.

It is seems like sick banks (or putrefying) is clearly a national problem for each member state. As to the postulated international nature of banking this argument leaves the EU indifferent. You can see that form the fact that f.i. Danske Bank has finally thrown the towel in the ring and impaired their Irish adventure as an overture to a more serious chastising concerning their overly large national importance and size.

It is credible that few have actually noticed Jörg Asmussens answer to the direct question of a common EU financing of a nation’s banks. The eventuality that a country might not be able to cope with their broken banks has, according to Asmussen, already been planned for; “…but we are not there yet.”

The coordinate economic effort has received the most public attention, but parallel to that work has been in progress to restructure the banks. Now finance is a highly technical subject and not as easily understood subject for the general public. The EU is in these years coming a long way from the time when the bacon prices were the main subject for debate.