Paul Shea has the following assesment of the European situation.
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I think him wrong in most places.
There is not the assumed similarity between the USD and the EUR:
1) The EUR is not a reserve currency. The only country with sufficient clout in the EU is (correctly) Germany; but Germany does not run a consistent deficit: On the contrary.
2) The EU has 27 different economies each with sovereignty. These economies are run very differently – irrespective of size – ranging from Greece with a fraudulent administration of a population of lazy and inefficient electors to an ex-communist dominion like Estonia that in less than 10 years has turned around from complete disaster to a state with prospects.
3) The EU has not a unified banking system. One thing is that the ECB does not have monopoly in the same way as the FED has. The other is that the other currencies have varying degrees of association with the EUR ranging from the welded bond of the DKK to British pound without any control – to the Icelandic krone without any connection at all.
4) Shea’s reiteration of the completely false notion that the EUR is going to break up – it isn’t. The candidates for expulsion are countries such as Greece, but they can’t opt out! The simple reason is that they in all ways, shape and forms run a deficit. I’ve tried to explain: If Greece reintroduces the Drachma they will still have to borrow money, but from whom? Nobody will give a Greek the time of day without advanced payment in what is known as money – which Greece doesn’t have, as nobody will lend them any. The only place they might get a small amount of credit doled out is from the EU on a set of conditions.
5) The idea that a country and a bank cannot go bust is totally false – of course they can. Greece just did.
6) A large part of the European banks ARE bust – that is their assets are lost. There is no hope that the Spanish banks will EVER regain solvency. Their “assets” are mainly in building material heaped up in useless dumps called real estate. Who are going to pay those losses: The Spaniards of course – they are the only ones who can tax Spaniards. If they don’t they will go bust. The present Spanish problem is that they are on the way to rebuild a halfway functioning economy. In that case there might be a possibility of extending credit until the taxes can be collected. That will take some time, as the Spanish government at the moment hasn’t got the foggiest notion of how much money is going to be advanced.
7) Emergency loans might be extended; but it will be repaid either by the Spanish tax-payers a demographic that will have to be extended violently – and ruthlessly. The next fall guy is the Spanish pension funds – ultimately the creditors: I.e. the dimwits that thought nations could not default – that is mainly other banks.
8) Eurobonds are not to be printed to shore up bankrupt banks. Real money is to be made for useful investments that will actually have a yield: Infrastructure like HVDC network.
9) European banks are not going to be shored up they are to be merged, stripped of “equity” and nationalized – the annual losses taken are to be paid by the tax-payer. That might bring out some efficiency in tax-collection which is sorely deficient. Furthermore their bingo-parlor trade divisions are going to be closed down. That will cut the British GDP with 30% – that is another great benefit.
Are Eurobonds going to be made? – I very much doubt it. Not beyond providing finance for sensible trans-European investments. A Tobin-tax? Well Schäuble wasn’t too optimistic a few days ago; but that is a matter of time and form in my estimate.
What is going to be made is a European bank inspection. It has already started – the implementation of the Basel III and its rules about solvency is going along steadily. All banks are being audited and the value of their assets appreciated. Real estate is being evaluated square foot pr. square foot of real estate. Agricultural loans are being evaluated farm by farm – acre by acre. It is a slow process but it is progressing relentlessly. This process will eliminate the usual bank ploys such as crossholding each other’s worthless shares. The assets are evaluated – and the liabilities are subtracted (they are normally easier to account for than assets) – thus the capital need is the difference between the two.
What is totally wrong is the idea that stimulating the economies is going to get the banks out of trouble. The degree of debt is a bit different. Some countries have huge public debt – Italy springs to mind – where others have huge private debt (Denmark being one of them). But debt in the magnitude of more than one times the GDP. As that debt is not being paid back for the time being – it totally unrealistic to assume a growth that will both save the banks (say a payback of 2-3% on principal) and the 2-3% growth needed to ward off unemployment in the long run.
No the solution is not to inflate yourself out of debt: That is like getting rid of a boomerang! When inflation goes up – so does interest rate: Inflation is just an accelerated amortization.
The real problem will be to maintain real growth under deflation.