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July 5, 2011

Blood in the Water

By Spear's

Sitting in our island with its own currency, it is easy for the British to become complacent and fail to notice the increasingly exacerbated tensions within the eurozone, but that would be a mistake

MME CHRISTINE LAGARDE has been (all but) confirmed as the next chief of the IMF, to the chagrin of the BRICs, who justifiably felt that a non-European emerging market country should assume this commanding vantage point of the coming new world order. With the growing crisis in the eurozone, however, it just had to be a European, as the European Central Bank has not got the firepower on its own to bail out the zone if the position deteriorates further, which it is bound to do on fundamentals, such as the differing and ongoing comparative productivity of each country, let alone the unsustainable levels of debt everywhere.

Sitting in our island with its own currency, it is easy for the British to become complacent and fail to notice the increasingly exacerbated tensions within the eurozone. The 15 May movement in Spain, dubbed Los Indignados, is led by the youth against the 45 per cent unemployment rate of their generation, and their assemblies in Madrid and Barcelona are swelling every day, emboldened by the overwhelming rejection of Zapatero’s government in the recent local and regional elections.

This revolt quickly spread across the Pyrenees, with daily demonstrations by Les Indignés in Toulouse, Bayonne, Lyon and now at the Bastille in Paris. This movement, which also complains about the democratic deficit in EU affairs, has its origins in the earlier and ongoing demonstrations in Athens and is fanned by the Arab Spring in Tunisia and Egypt.

Now the people are mirroring the EU’s fundamental economic fault line: the southern PIGS want jobs, which effectively means the reinstatement of their currencies or at least a currency that enables them to enjoy the benefits of a competitive devaluation against the strong northern core. And the people of the euro north, especially the Germans and French, smell inflation and the onset of an EU transfer union that sees their earnings propping up the soft underbelly of the south.

The problem with a popular uprising like the ‘Indignant Ones’ is that it can soon spread like wild fire across a whole continent, and this could even happen before Lagarde takes up her position at the end of August. It is hard to see any effective way out of this unsustainable mess, other than some giant fudge like the launch of a monster €2.0 trillion eurobond, underwritten by the ECB, that would be the wooden horse for a permanent EU transfer union, which the northern core is determined to avoid — but no doubt Lagarde will try to push the problem back to fester away in the long grass.

In fact she has to try, because it’s not just a problem of the public finances of the PIGS, it’s a problem of the whole European banking system. When the euro was introduced in 1999, with Greece joining in 2001, the previously national banks saw that with the continent-wide currency they were set loose from the shackles of national geography and currency and could now engage in cross-border lending with gay abandon, secure in the fact that the eurozone was underwritten by being the biggest economic bloc the world had ever seen. How wrong they were not to see that the risks were also larger: Ireland, Iceland, Portugal and Greece have been brought low by the collapse of their banking systems, but the same could happen to Germany and France, whose banks are awash with eurobonds.

There is blood in the water, and the bond vigilantes are circling, but also circling around them are the hedge funds, who know the smell of blood means potential huge profits amid the losses, as when one country buckles the rest could be picked off one by one like a collapsing pack of cards.

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On White Wednesday in September 1992, the UK government failed to realise that one or two hedge funds, led by the Soros/Druckenmiller Quantum Fund in New York, could outgun a central bank, which they had already done with Italy and went on to do with Sweden, making a billion dollars each time: the global hedge-fund universe is now much bigger and can hunt in packs. If you’re not a hedge fund, no matter, just hedge the whole situation, including Ben Bernanke’s crazy printing of $600 billion of QE2 by buying gold, like Mexico has started doing.

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