There is a famous scene in the 1976 film, The Outlaw Josey Wales, starring Clint Eastwood as the eponymous hero. During a particularly brilliant exchange, the bounty hunter Fletcher, hot on the heels of Wales, comes out with an inspired put-down to the cowardly senator who is trying to pull the wool over his eyes.
Squinting into the sun, saloon door at his back, chewing tobacco, Fletcher disdainfully hisses: “Don’t piss down my back and tell me it’s raining.”
The expression, which is originally from South Carolina, beautifully captures the moment when someone who is being lied to turns the tables on the person who is lying to him.
When it comes to the fiscal compact, the EU is pissing down our backs and telling us that it is raining. And the fact that the government is also going with this line implies that it is party to this falsehood.
Brussels is pretending that the fiscal compact is necessary to strengthen the euro. This is nonsense. The fiscal compact has nothing to do with solving the eurozone’s problems. Let’s be clear about that. It has everything to do with reassuring the German electorate that they will not be on the hook for the internal inconsistencies of a currency union, which they were bounced into a few years ago.
When I say ‘bounced into’, I mean the Germans never wanted the euro. They were more than happy with the Deutsche Mark but the French demanded that the price of German unification in 1991 be greater EU integration. A new currency would anchor Germany into western Europe, just in case the newly-unified Germany got itchy feet again and lurched eastwards.
Throughout the 1990s, the German public was kept in the dark about what all this meant for them. In the past few years, they have woken up. But they are now told that they are on the hook. However, this is only half the story.
Germans should know that there are no free lunches, and the greatest free lunch of all was the belief that Germany could lock in a permanently cheaper exchange rate off which to export without a price. Of course, the quid pro quo of their huge trade surplus was massive inflows of money to Germany, which has to be spent somewhere.
Had they their own currency, it would have risen in response to these inflows and German exports would have become very expensive. This didn’t happen, so Germany got turbo-charged export conditions, a massive current account surplus and huge financial exposure to its neighbours because German banks re-lent this cash to the periphery of Europe.
Unfortunately, no one told the Germans this bit of the story. As a result, they have misdiagnosed the ailment and they claim every problem begins and ends with free-spending governments.
But the financial panic wasn’t caused by budget deficits. Ireland and Spain entered the crisis with budget surpluses. The problem in Europe is driven by capital flooding from the north to the south and west.
At its core, it is a problem of capital flows rather than budget deficits. Ireland and Spain’s budgetary problems are the consequence of capital flows, not the cause of the crisis.
It is important to remember in Ireland that the reason we are in the clutches of the troika is not because we threatened to default on our debts, but because we didn’t. It was when we said we could pay everything that investors panicked.
So the problem for the euro is the capital flows between the creditor nations and the debtor nations.
What caused the problem? The culprit is the current account imbalances. Ours has reversed dramatically, providing the evidence for the idea that our budget deficit is simply a reflection of a massive increase in domestic saving, rather than explicit government spending.
The turnabout in our current account position reveals the massive domestic swing to saving over investment.
It also suggests that, when the eurozone breaks up, as I expect it to, Ireland will be able to finance itself. In fact, in the coming era of capital controls, this country will be in a better position than most. Far from being dependent on foreigners for financing, the ludicrous reality today is that this country is actually exporting capital – capital, which could be much more effectively deployed at home.
The real story of the past five years is that government spending was driven to replace the increased savings of the private sector. If the government hadn’t spent in the past five years, how deep do you think the recession would be now?
When we look at the entire eurozone debacle, we see an example of a monumental misdiagnosis to suit German political opinion.
Doctors will tell you that sometimes misdiagnosing the aliment is as dangerous as no diagnosis at all.
By focusing on budget deficits as the ‘fiscal compact’ does – which is not the root of the problem – the Germans are pissing down our backs and telling us it is raining.
And while they might be able to fool the insecure Irish people into voting for the ‘fiscal compact’, they are not fooling investors.
In the past few days, investors have taken flight from the bond markets of Spain and Italy and now, interestingly France. After all the cash injected by the ECB, investors are heading out of Spain and into Germany. They realise that the euro is a currency primed to explode.
Many years ago, this column argued that the euro would break up. Back then, I thought the break-up would be the likely upshot of a dramatic eurozone debt crisis. Now I am certain that this will come to pass.
A bit like Ireland with the bailouts, the flight from Spain happened, not because Spain said it wouldn’t meet its tighter budget targets, but because it said that it would! Investors know this is not politically possible.
We have yet another summit this weekend, while today we have an election in France in which the people are set to give Nicolas Sarkozy his marching orders. The world knows that the fiscal compact is not credible. Eventually, the people of Spain and Italy will get fed up of austerity, and the people of Germany and the Netherlands will get sick of bailouts.
The currency will go the way of most monetary unions; it will break up.
Remember there have been plenty of examples of countries leaving monetary unions in the past 100 years. It’s not unusual at all.
In these weeks of April showers as we go into the campaign season, remember that sensation of dampness you are feeling down your back is a bit too pungent to be water.
David McWilliams will be speaking at NUI Maynooth on Tuesday April 24.
excellent article. its always back to government. therein lies our problem, we have to cut and cut and cut it back to allow us all the breathe. this EU and govt fetish of controlling markets, in fact controlling everything, will kill us all.
just saw this clip this morning.
where is the EU and Irish equivalent of this? we are now slaves and whats worse, dont even realise it.
Thought provoking article David, nice one, thank you. Can I take a look at the central idea the analysis hinges on ….. ‘The problem in Europe is driven by capital flooding from the north to the south and west.’ I cannot help but think but that surely the Irish banks irrigating in from the German banks the slush monies are responsible for Ireland drowning in debt. Surely the Irish banks grab on the German savings is where the chink in the chain is here. The turbo boost in German exports IMO is a good thing. It makes high quality product… Read more »
Yeah good line from a great film.
Here is the clip, beautifully delivered by John Vernon http://www.youtube.com/watch?v=kfdpcrOgUp4
With the massive shifts in the EU political scene, potential socialist President in France, fall of the Dutch government, Spain near the edge, Italy not far behind, Ireland trying to be the best boy in the class, holding a referendum seems off the wall.
So, is it not the case the pisser in the articles analysis is surely the Irish banking insider class keeping mum, diverting Irish public monies into their coffers, keeping mum again, letting everyone else take the blame.
Another good line from that film which is appropriate also, is when Clint Eastwoods character is in the bar and a rough looking bounty hunter asks him
“are you Joesy Wales, your wanted” to which he replies
“you a bounty hunter”
The Bounty Hunter says “a mans got to do something for a living these days”
To which Joesy Wales says “DYING AIN’T MUCH OF A LIVING BOY!”
Austerity ain’t much of a living for the people of Europe!
Watch the German economy start to falter. Cheap Euro will not be there to help it along for much longer. Indeed, with the major imbalance of trade between West and East starting to become more apparent, I expect large exports Germany is tuned for will start to create problems in the very near term. The turbo charging German got will need to be wound back a) because it will not get the money it lent out and b) excess capacity force their own internal devaluation. No one has won here. The bankers are discredited, the get rich quick brigade are… Read more »
Sarkozy will WIN
In the south of France and the island of Corsica many of the voting regions gave Sarkozy their first preference and this was closely followed with votes for Le Pen with Holland showing a poor third .Ipsoc now predicts that 60% of Le Pens vote will vote Sarko and 19% Holland and the rest abstain.
Lone Watie (Noonan) tells Josey (DMcW)about a meeting that he and some of the other chiefs (Kenny, Gilmore etc) had with “Abram” Lincoln (Merkel). “She told us we must ‘Endeavor to persevere.’ We thought about it for a long time, ‘Endeavor to persevere.’ And when we had thought about it long enough, we declared war on the Union (Austerity).”
Big capital inflows into a country cause big problems.
Huge capital inflows into a country cause huge bubbles and crashes (Ireland being a sad example).
In all the posturing about the debt crises in Europe, why is no one/no country talking about limiting capital inflows? Brazil does it, having learned how evil unrestricted, big capital inflows can be.
Agree with Nono that Le Pen voters will express themselves on 6 May next by NOT voting at the second round.
I have a question. There are many Irish people like myself living outside of Ireland, in other EU countries. In the case of a break up of the Eurozone and even the whole EU, what would become of our residency rights in other EU states? What would happen to people like myself who were forced to emigrate to find work elsewhere in another EU state?
So is the inference here that a ‘no’ vote on the treaty will help bring forward the inevitable / eventual break up of the monetary union – thereby expediting Ireland’s return to a stronger position?
It has always been my favourite quote when it comes to politics, long may it reign.
Very good article.
Contrast with Simon Coveney on radio this morning. Yes vote is needed for continued recovery. Euro is essential and China is the answer to all our woes.
As we know the former vice chairman and managing director of Goldman Sachs International, Mario Draghi, who now heads up the ECB, has doled out a trillion euros in 1% long-term credit to the European banks in the past few months. It is interesting to consider the fate of this enormous sum of ‘our money’. It is our money; since it is we, the citizens of Europe, who are the ultimate guarantors of the ECB. Many of us in middle or later years tend to think of banks in terms of how banks used to function 30 or so years… Read more »
What are you talking about David? The sun is cracking the stones outside and you’re telling us it’s raining
Just a little background on why everyone exists to bail out the big banks:
The big banks are holding over 225 $trillion in losing derivatives. The big banks have to replace these derivatives with a lot of real cash – your cash.
For 700 years the Irish blamed the English for their trauma, then there was a brief period when the influx of Eastern Europeans was blamed for everything from crime to stealing jobs and now the Germans have fallen victim to another flight of the Irish imagination. Am I the only one to spot the common denominator here?
Lookit! If we vote YES, we vote for grinding austerity and budgetary adjustment, whilst similtaneously attempting to plug the hole in our banks, which will get bigger as mortgage defaults increase and increase… but if we vote NO, we don’t qualify for ESM bailout money so we get aven more drastic austerity quicker as we absolutely and utterly run out of even emergency funding. If we vote NO, we’ll be so broke we will certainly default on bank bondholders. It’ll be a massive break with our currently ‘strategy’. We may even end up out of the EZ, back with the… Read more »
The treaty is now firmly a sideshow,of little relevance. Russian stock market posted massive losses. Dutch parliament Dissolved,P.M resign’s. Sarkozy loses first round in Presidential election.First time a sitting President has lost first round since “58” Bundesbank owed 616 Billion Euro from E.U Central Banks……”like to see them get that back” FT Czech Government dissolved…Monday. Investors selling [ dumping ] Spanish,Italian and now french bonds in favour of more conservative German bonds….FT I will be voting No to the treaty,but following on from the weekend political activity I think it will make no difference either way. German elections to follow………….this… Read more »
“Germany – Euro style austerity at home? No thanks.
Under Merkel, Germany has forced high-debt countries like Greece, Ireland and Portugal to accept painful austerity as a condition for financial aid. Spain and Italy are also making unprecedented budget cuts in a desperate bid to avoid bailouts.
But in NRW, a rust-belt state whose debt has swelled to a record 180 billion euros ($237.74 billion), the electorate is rejecting Merkel’s message of fiscal responsibility and embracing the SPD’s go-slowly approach, which promises investments in children, education and NRW’s ailing cities…”
Enda Kenny states that the Fiscal treaty is like an insurance policy which we must have, Simon Coveney asserts that it is as essential as a lifeboat on a ship. Fine, but imagine an insurance policy which insists on one having a lifeboat, but due to financial restrictions, prevents one from carrying out the necessary repairs to keep the ship seaworthy. This is why I will be voting no.
Is this a slightly different way at looking at the same problem, (note: its more based on the US but makes several references to Europe).
Scania,the dictatorship’s main weapon is the use of artificially low interest rates,the cause of and the “solution” to this crisis which will lead to ever greater inflation,lower standards of living and we will all work longer and harder for less as a result.
Democracy is being ruined by fiat money,in this case it does grow on trees, German ones,and the leaves always get clogged in the gutter of the periphery again and again.
if we vote Yes or No,what will change anyway?
As I remember during the 80s we had massive speculation of our currency and as a result we had crippling interest rates.If we roll back into our own currency who is to say we wont face that demon again or have things changed in the world of high finance?
Correct me if I am wrong but we borrowed 16 billion last year to keep the teachers , nurses and just about everyone working in the public sector. So we could go it alone if we thought we could get anywhere. Enda Kenny knows if the ECB say finance yourself from now on means he wont be paying himself 200k a year. At the other end of the scale the lads and lassies on 200 a week on the dole wont get their cash either. There is only about half the income coming from the private sector and the way… Read more »
[…] McWilliams has written another articleÂ about the real motives behind the EU fiscal compact treaty. As I mentioned in my very first post, […]
Four stages of grief – 1. denial … 2. numbness … 3. anger ..4. reorganization of life. Most Irish and US citizens are in the first two stages most of the time, but also vacillate between stages 3 and 2 often. Many others in the anger stage, as in Spain and Greece. But the anger is dismissed, nothing changes. The politics of anger does not work any more. The western states have learned to absorb, isolate and ignore the anger, however widespread. Europe and Ireland on the whole are more right wing than left wing, out of fear and a… Read more »
I wouldn’t bother me bollix anymore engaging with anyone on this site, including its author – ye’re all wind and piss. Ye talk, we walk, every Sunday in Ballyhea and Charleville. There is one issue that should bind us all, the bank bondholder bailout; eventually this will become clear to all but it’s clear to us already. Get out from under that bank debt burden and we’ll all know where we stand; stay in there, we’re sunk.
And another desertion from the Good Ship Eireann. This would have slipped under the radar only for another fine piece of digging by @namawinelake. http://bit.ly/Jn1L2x Have a good read and then go figure how the Fiscal Compact will deal with this reality. As David keeps saying, the markets know all aboutthis skeleton concealment and exactly how exposed our banks really are. My own opinion, for what its worth, as well as keeping the head on the average hardworking German voter, is that the Fiscal Compact is designed to maintain a status quo of power and wealth across a well connected… Read more »
Rewrite the article and where you have put in the word “Germans” put in the words “German Bankers”.
The German population are just as much victims in all of this as the rest of us.
Hang on a second gents.
The German bankers are not too blame here.
Did anybody put a gun to the Irish bankers and force them to take in the capital flows from Germany.
The German bankers and their humongous cash pile flowed and the Irish bankers grabbed all they could grab.
The record speaks for itself.
The worst property bubble in the world, in Ireland for 10 years.
Blaming the German bankers is really just avoiding the real culprits responsible.
Did you hear the one about Argentina re-nationalizing it’s oil and gas resources?
Yeah taking it back off the Spanish company Repsol, staking a 51% controlling ownership in YPF company and reducing private interests to 49%
People hear say it is too late to do that in this country or that we cannot do it.
What’s stopping us only our pitiful spineless self-serving politicians????
Josey who is better at running oil companies Exxon Mobil or Hugo Chavez?
My comment is within the context of the article.
The article lays responsibility at the door of German banks.
The first door to go too to knock on to cast responsibility at is the Irish banks.
This is the ethical fact of it.
Those primarily responsible are those who took the money.
The German banks and their measure of responsibility is below Irish banks.
The rest of it I agree Josey the system is using debt money to transfer real wealth from the many to the few.
*are* the Irish banks.
The article is about WHO is responsible/
The fact of the matter is that the Irish banking system is primarily responsible.
There is no alternative.
The irish banks are primarily responsible NOT the German banks.
David is in error in the article placing the primary responsibility on German banks.
The grabber of the cash – the Irish banks are the primary culprits.
There can be no doubt about this.
The irish banks are PRIMARILY responsible.
NOT the German banks.
So, David, if you are reading this, I am challenging you on your contention that the German banks are primarily responsible.
You are incorrect.
And way off the radar screen on this assertion.
Lets be clear about this.
The Irish banking system is the No1 culprit NOT the German banking system.
Just to be clear.
I am using the term *responsible* in regards the concept of accountability in its ecclesiastical, common law and civil law definitional understanding.
THE CENTRAL BANKING MONEY SCAM IS AT FAULT. A GIANT PONZI BUBBLE -> ALL MONEY IS DEBT. TO PAY INTEREST -> IT HAS CONSTANT REQUIREMENT FOR NEW BORROWERS! THE SYSTEM WOULD CRASH WITHOUT BORROWERS -> CREDIT CRUNCH. THIS IS THE REAL REASON FOR THE CRASH -> DEBT SATURATION. BORROWERS ARE NOT AT FAULT -> GUILLIBLE VICTIMS. THE TRUTH IS -> LESS BORROWING -> WILL CAUSE A CRASH QUICKER. THIS IS WHY THEY TEMPT WITH LOW INTEREST RATES. HA. SOMEONE IS ALWAYS NEEDED TO BORROW THE INTEREST… -> THERE IS NO SOUND BORROWING. -> FINGER POINTING IS WHAT THEY WANT. DAVID… Read more »
@Josey I’d like to see if the nationalised Repsol will be as efficient and profitable as Exxon – profits are good for People, profits = jobs.
People pin the tail of responsibility on the particular donkey they want to flog. Many pin the tail on their neighbours; the plumber down the street; school teachers; public servants. Some pin it on the politicians or the government. Then there’s the Irish banks; and the European banks. We’d need a whole sack of tails, of varying sizes, to satisfy everyone. Me, I pin the biggest tail on the financial oligarchs at the very pinnacle of the financial system. The ones who effectively own and control our monetary system. It’s quite obvious that the deluge of cheap credit which was… Read more »
Davids observation of the facts on generation baby boomers running ponzi property bubble rackets is spot on.
They are and they did and they are doing the preps to do it again.
But in the context of the article in regards the banking accountability there can be no doubt in the scrutiny of the facts regarding the dynamics of accountability within the transaction between beneficiary and counter-party that the Irish banks are primarily responsible over German banking in where the responsibility is weighed regarding the mess they BOTH made.
Excellent article. Merkel is trying to get the countries of Europe to agree with living within their means, officially speaking. Given that so many politicians in so many countries have already broken so many rules, should we be shocked if this proves to journey towards more deceit. Merkel, is trying to prove that the politicians of Europe are converted to the cause of restraint. They are not. In some countries they have no choice, because the electorate will not tolerate any funny business. I some countries, the electorate is extremely tolerate of liberal spending regimes and funny business (think Ireland… Read more »
There is one possibility that you never hear in the media, no matter what the circumstances. The possibility that “more Europe” is actually going to cause more problems for the peoples of Europe. It is forbidden. Yet this is actually what we seem to be getting. The EU became increasingly more centralized after the Treaty of Maastricht. And unemployment has been shifting continually higher ever since, in the core six founding members. In fact it seems that the only way that Europe can address unemployment is to make interest rates so low, that ponzi bubbles are inevitable. And now we… Read more »