The Euro End's on 6th of May 2012
Politics / Euro-Zone May 05, 2012 - 02:14 PM GMT
Few Americans will have noticed that this Sunday the end of the Euro will take place. On that day the final run-off ballot between current French president Mr. Sarkozy and socialist presidential candidate Mr. Hollande will decide over the future of the Euro.
According to all polls the leftist socialist candidate Mr. Hollande will win by a safe margin over the current president Mr. Sarkozy and will be the next French president. Politicians in Berlin are biting their nails already in anticipation of the election result. The savings dictate that Germany has imposed on most of the other heavily indebted euro zone countries is vehemently opposed by socialist party leader Mr. Hollande who favors more government spending, meaning: accumulating more debts, in order to promote growth in the Euro zone.
But since poor economic knowledge is not only endemic to the relentlessly irritating Mr. Hollande but seems almost a prerequisite for success in the French socialist party, we shall not hold it against him. Still there is no reason to not be alarmed.
It is with utmost interest that I usually follow the "know it all" duo's, Nobel Prize laureates Messieurs Krugman and Stiglitz, statements. These prominent economists accuse the German Chancellor Mrs. Merkel, now, in the style of Heinrich Brüning, to destroy the European economy with austerity programs. Mr. Brüning was the last German Chancellor before the power of Adolf Hitler. Mr. Brüning had tried in vain to fight the effects of the global economic crisis in Germany with a massive austerity program, tax hikes and pay cuts. If Messieurs Krugman and Stiglitz complain about the weakness of the Euro area and ask from the old continent, state-financed economic stimulus injections, the simply ignore, or worse, do not understand massive structural problems in most of the Southern Europan Mediterranean countries.
The situation today is fundamentally different from Mr. Brüning’s era. Messieurs Stiglitz and Krugman are simply on the wrong track.
Economic stimulus injections may look good from a US perspective where the US Fed supports any such programs by simply printing the needed money (something which the European Central Bank per its articles is not allowed to do). More importantly such stimulus programs will only work if functioning government structures are in place. And this is not the case in the southern European countries, the so-called Mediterranean countries.
The Greek government system for example, by all common consensus, has been characterized by a deeply corrupt political elite who not only would put 25 year old daughters, nieces, and mistresses of ministers and generals on the payroll of the state funded pension system, but who even worse have not been able to establish a functioning tax collection system in Greece. Tax evaders have been left – and still are – unpunished. The list of sins is long, and not only in Greece. The politics of the southern European countries has been a collection of the worst political practice, known only from other notorious Third World countries. The tax paying electorate in the northern and central European countries with functioning economies, according to numerous polls, simply have enough of scandals and corruption among their neighbors, whose bills they have been footing now since many years.
Who is to blame German chancellor Mrs. Merkel? She speaks in the name of northern and central European taxpayers, who should pay the bill for blatant mismanagement of other countries. She is repeating her mantra: before additional billions of euros evaporate in the south, the Mediterranean countries should first do their homework, she says. A polite phrase for an ultimatum to the Mediterranean countries to either get rid of corruption and mismanagement or be faced with a stop of cash flowing from the rich countries in Europe to the Mediterranean countries.
I am sure if Messieurs Stiglitz and Krugman knew more about the patently ridiculous mismanagement in some of those European countries they would adjust their generalizing advice of simply putting more money into dysfunctional countries.
If a company goes bankrupt usually the first thing shareholders do is to exchange management and make sure a change program is being implemented. What Messieurs Stiglitz and Krugman now are suggesting – against all better knowledge – is not only to keep the current incompetent management in their lucrative posts but also to give them more money to continue their past disastrous course. Mrs. Merkel, understandably so, has had it.
This brings us back to French incumbent Mr. Hollande. His idea of reforms is to not only accumulate more debts by increased government spending, but – change nothing. No structural reforms. But in France the government accounts already for more than 61% of French GDP. How exactly is Mr. Hollande planning to accomplish the inevitable, which is to reduce the debt burden? By increasing the government’s pathologically large percentage in the French GDP even more? As France is part of the Euro zone he cannot ask the Central bank, unlike the USA, to print more money. Mr. Hollande will either have to ask the Germans to pay for his delusions or to stick to an austerity program or to leave the Euro zone. I am wondering if Messieurs Stiglitz and Krugman really had done their homework on the disastrous economic fundamentals of the European Mediterranean countries.
Viewed from this perspective, the conflict between Merkel and Hollande also is an attempt to both nurture the illusions of their respective supporters and to pretend that everything in Europe could be restored to the way it once was. It's an attempt to escape the bitter truths of the euro crisis, which is dominated by one truth in particular: If the European currency is to be secured over the long term, additional sacrifices are inevitable, above all among the southern Europan countries who will face a simple choice: leave the Euro zone or face tough structural reforms and austerity programs. We, the investors, can safely assume, that the Germans and the remaining small number of northern functioning countries in Europe, will no longer foot the bill of incompetent corrupt political elites in the Mediterranean Europe.
But France’s Mr. Hollande is not the only problem. None of the Mediterranean countries in Europe are supportive of structural reforms and austerity programs. Their electorate is unwilling to reduce their current standard of living. There is no support whatsoever among voters for structural reforms. Who could blame them? For example, hundreds of thousands of farmers in the Mediterranean countries have become accustomed to the fact that approximately 53% of their income consists of subsidies paid by the European Union, which is ultimately fed with cash from Germany and a small number of functioning countries in Europe, who have been paying the bill since years. The political elite in the Mediterranean countries has not been able or willing, likely out of fear of being voted out of power, to tell their electorate the bitter truth.
In France this Sunday probably a president will be elected who has promised to his voters to stop the current reform efforts and its unpopular effects. Even in Greece extremist parties will dominate the Parliament and likely reverse the reform package imposed by the Germans, thus risking the disposition of bitterly needed further credit lines, paid by the Germans. The ruling parties in Greece have in the past few months hardly dared to justify their austerity measures. In the Netherlands, a government has failed because their meager budget plan just could not even say goodbye. In Italy and Spain, countries already plagued by massive unemployment rates of above 25% and huge debt burdens, there are increasing voices, to cancel the reform efforts and resume the catastrophic debt policies of the past, even supported by the German socialists.
If those anti-reformatory people should actually be successful, the Euro cannot be saved. Connected with demands for growth packages and more debts, the illusions communicated by those people to their electorate are that you can save yourself the necessary restructuring of the economies, if only it were possible to produce economic growth – by the means of more debts.
This concept has not worked in the past with the same political elite, why should we assume that it will work now or in the future?
The political leaders from the Mediterranean countries apparently do in fact want to continue supporting ailing structures, while asking Mrs. Merkel to pay the bill.
In other words, the Mediterranean countries are asking nothing less from German Chancellor Mrs. Merkel than to share revenue of all Euro countries by the means of Euro bonds as well as transfer taxes imposed on the rich and functioning northern countries to the favor of the ailing and corrupt structures in the south.
This is equivalent to, a hypothetical example, the Argentinean government asking the US to share revenues and use the US-Dollar instead of the Mexican peso. An obviously unacceptable idea.
You can safely assume, dear investor, that the electorate in Germany and the other remaining functioning countries in the Euro zone never will agree to that. Why would they?
Last but not least, considering the astronomical dimensions of the debt burdens of the Mediterranean countries, we shall not forget that Germany financially is not able to save Spain or Italy, much less France. Those three ailing countries are too big to be saved, but by no means too big to fail.
And therefore I suggest with a high degree of confidence that May 6th, 2012, we will remember as the day which marks the end of the Euro.
My advice to investors: stick to precious metals, commodity opportunities if priced right, select real estate and the Swiss Franc.
By Volkmar Hable
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