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  1. Wealth
November 21, 2011

The EU on its last legs

By Spear's

The farce of the EU leaders trying to save the eurozone has reached new heights of idiocy

The farce of the EU leaders trying to save the eurozone has reached new heights of idiocy, as the debate reveals ever greater divisions in the heart of Europe, as they seek to save that which is headed to inevitable disintegration, because of the intrinsic contradictions implied by and inherent in EMU. Oscar Wilde would have loved to witness this exercise in human folly: the unelectable in pursuit of the unworkable.

Merkel’s response to the crisis is more of the same: more fiscal and political integration, more rules and controls, more austerity for the debt-laggards, but without the necessary devaluation. This policy of enforced debt-deflation is economic suicide for the periphery, while further integration cannot be implemented democratically within the necessary timescales to cope with the engulfing crisis.

And it doesn’t anyway begin to address the cause of the crisis, which is the hugely different levels of productivity, tax collectability and debt levels, none of which are about to go away. Her approach is an idiocy set to consume the wealth of nations, other than Germany’s, but even that’s a risk she has decided to run.

Sarkozy, as No. 2 in the Euro-hierarchy, follows Merkel wherever she goes because he thinks he has no other choice other than to follow his leader, hoping for indirect assistance: he is worried stiff about the excessive French state-encouraged bank lending to the periphery, so he is desperate to save the euro so as to save his country’s banks, or at least to buy them time to unwind their exposures, without the French exchequer having to put its hand into its near-empty pot, thereby incurring a credit downgrade and higher interest charges. And now he’s on the austerity wagon too, with another €65.0 billion cuts on the way.

So, the EU has forced the undemocratic appointment of two EU-apparatchiks to run Greece and Italy, meaning yet more senseless austerity – senseless, that is, without devaluation – so their situation and their GDPs can only get worse, not better. At some point the electorates will take to the street, and nothing brings down governments quicker than civil disobedience. Ask Cameron, as he had to hurry home last summer, and that was just to deal with an outbreak of “extreme shopping”.

What else can Merkel do? Answer: not a lot, as the obvious move to knock the whole absurd structure into a giant political and economic transfer union, which would at least delay the inevitable collapse for perhaps another decade or so, is not something the Bundestäg is prepared to consider, and the Karlsrühe Constitutional Court has anyway ruled against it too.

It would require a vote on a new German constitution and would surely fail, as the German electorate are in serious anti-bailout mode. And the Germans are not about to agree to the ECB becoming the lender of last resort to member-states, in effect a transfer union by stealth: memory of the Weimar Republic’s Great Inflation is seared too deeply into their national psyche.

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And yet that is precisely what the Anglo-American economies are going to do, namely inflate away their monstrous debts by printing money and maintaining low interest rates. Every time you read there is more QE coming down the ’pike, it will be dressed up as helping to stop the recovery from stalling, but don’t be fooled by that one.

The BoE produced a study of the effects of QE1 on GDP, just as they launched QE2, but the methodology is as daft as a halfpenny watch. At least the answer, some 1.0% increase in GDP, was very near the number they presumably first thought of, with the methodology and assumptions tweaked accordingly.

Next, the Fed will engage in QE3 as well, and then the BoE will extend QE2, and so on. They are both dab-hands at this sort of thing, devaluing their currencies so fast in the aftermath of Lehman that nobody noticed at the time; the speed of hand always did deceive the eye. A happy ending to all this euro-lurching around and endless QE is, unsurprisingly, not an immediate prospect, as the western world polarises between sound German money and Anglo-American profligate printing-presses.

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