Have you ever heard the expression “marry me now, the love will come later”? In the old days when a couple was forced together by the matchmaker, this gradual process of emotional osmosis was supposed to happen as time and loneliness took their course.
Often it didn’t and, as a result, Ireland was a country of silent homes, filled with psychological terror, violence and sadness.
Watching the depressing ‘Ballroom of Romance’ on TV the other night, I couldn’t help thinking of the dilemmas facing the architects of Economic and Monetary Union (EMU). The crisis facing the euro is one of a loveless marriage where the marriage itself has amplified differences that were evident from the start.
When assessing risks that might derail this bizarre construct, central bank economists focused on the risk of governments using the monetary union to borrow all they wanted. Therefore, the rules were drafted to prevent politicians of poorer countries — those without much access to capital — taking advantage of the monetary union to increase borrowing.
The economists forgot about the banks and the private sector and EMU became a financial crackhouse for large delinquent banks in the core of the union and their mini-wannabes in the periphery.
Take Ireland today. German and French banks only hold €10bn of our sovereign debt. But they hold €74.5bn of Irish bank debt. It is no wonder that the Europeans (led by the French and the Germans) are so keen this week to stop Ireland defaulting on the bank debt.
Anyone who pointed out this banking faultline in the early years of the 2000s was told that they “didn’t understand”. Well we understood, only too well.
We knew a monetary union without a supporting political union was a hopeful matchmaking exercise. Given that the single currency had no provision for divorce, the hope was that the unaccustomed newly-weds would learn to love each other and co-operate.
Fast forward a decade and we are now in the middle of the first monumental row of the marriage and there has been little sign of love and many indications of increased acrimony.
There is a fundamental faultline in the euro because, as it is designed at present, it means there will be periodic defaults and there is absolutely nothing the guardians of the system — France and Germany — can do about it other than threaten the weaker countries with supposed sanctions.
There is no mechanism to force the exit of one country. So the likes of the ECB’s Jean-Claude Trichet and Juergen Stark and all the others are stuck in the inconsistency of their own grand delusions.
On Monday, Trichet said he thought that Ireland could pay all its debts; it begged the question why was he so sure, when the markets thought the opposite? Yesterday, the yield on two-year money in Ireland moved above 10pc — that is above long-term yields.
There are many reasons for this but none of them would amount to any player in the market agreeing with Trichet.
We are in a serious crisis for the euro and all Trichet can do is repeat mantras. He knows, and we know, that we are caught in a debt trap. With no exit from the currency, there is nothing that the Germans and French can do but face a slow car crash of progressive defaults.
The other players in this tragedy are the markets that are shorting all peripheral markets in the expectations of a blowout. The more they sell short, the more accentuated the crisis. And it’s not just Ireland.
According to the latest figures from the Bank of International Settlements, French and German banks between them are owed €763.8bn by Ireland, Greece, Portugal and Spain. The French and Germans realise they are on the hook so they are desperately trying to rewrite history — a history where only the debtors are culpable.
But every capitalist knows that when a company goes bust, the key concept that dictates the receivership and possible subsequent rebirth is co-responsibility, where the lender and borrower are both culpable.
Every capitalist who knows a bit of economics also knows that, if you have a system where a bust country can’t pay its private debts, it will endure years of deflation and high budget deficits, which will ultimately get so big that they will have to be defaulted on and the last lender will lose everything.
There is no way out of this because the EMU architects never allowed themselves to think the unthinkable. Well, the unthinkable has happened and over the next few days our negotiators should just hold tight in the knowledge that we are all in this loveless marriage together.
There is little point in France’s Nicolas Sarkozy flying off the handle and demanding more dowry in the form of corporate tax reforms. It won’t make a jot of difference. We are now together and the only way out of this is a divorce or a two-speed Europe with default, restructuring, repudiation or whatever you’d like to call it.
The only other way out is full political and fiscal union, which the people don’t want; or the Europeanisation of all liabilities in the form of a huge, bumper European bond market, which Trichet and Germany have ruled out. Well you can’t have it every way, lads.
Our boys should just sit tight at the summit and watch the others squirm for a change.
Most positive guy I heard in a long time was today Mike Ferick of Alison.com. Pointed out we should become the gateway to Europe for China and do business deals with them in relation to our debt without selling all we have something the EU wants. Lets deal with China!
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The Meek Shall Inherit The Earth
Now I am beginning to feel in awe of all those in negative equity and large land bank loans they have used their God gifted talents and may now have their bank commitments devalued with a consequent land / property value RISE once more .
C’est Possible ne pas?
Tody the Sun continues to Shine.
Yeah, I reckon that the dominant emotion inside Brussels every time this crisis erupts is fear. Fear that the whole thing might get found out. And there is a lot of squirming going on in Paris. If you want to see what the EU is in one country, then look at Belgium. It has no government at national level. Government at local level is functioning fairly efficiently in one part, and badly in the other. http://www.youtube.com/watch?v=ToK4w8FbCtc Can somebody please tell me what exactly happened during the Belgian presidency of the EU ? Did they discuss the parallels between what the… Read more »
Unfortunately the noises being made about the summit is that the can is just going to get kicked further along the road. We can’t make any decisions now in case our banks end up needing more money after the end of the “stress tests”. So let’s deal with the whole problem en bloc later.
If it was me I’d say we should be marching on the Dáil to tell Enda to tell the French and Germans the game is up and we won’t be paying for their banks. But there is no spirit in Ireland for that sort of action.
Well as David says the problem was created by the private sector – the financial sector. Financial capitalism has usurped the political and social order and has bankrupted the entire planet. The only solution is to severely regulate their activities (in fact ideally to get rid of them altogether) and the only people with access to the power to rein them in are politicians. But they will only act if they have to; and it will have to get a lot worse before they will have to. Meanwhile they are busy rearranging the deck chairs.
Given the chronic inability of the French economy to generate growth, employment and opportunities for young people, Sarko might be doing a lot of squirming. Merkel is actually open to the idea that allowing incompetence to get it’s just reward might be beneficial. But Sarko is resolved to be completely against the idea.
David finds many different ways of telling us his mantra forecast…..default will happen. This is not necessarily a given, Ireland may be allowed to restructure over a longer period of time, this is the more likely scenario as Europe is good at “kicking the can down the road”. In fact sovereign debt never gets repaid it just keeps rolling over. In 2014 our national debt will be 176 billion, currently its 95 billion. The budget wont be balanced until 2016 at the earliest. Kenny and Gilmore have no intention of dealing with the debt they will just pass it on… Read more »
Markets are shorting the hell out of the peripheries. There will be no kicking cans down the road for much longer. Euuuu…Mon Trichet, you av a liddal margin call or deux to honour….can you please attend to this immediatment or German and French baaanques may find their overnight facility disparu. The only thing I blame is the naivety of the EU bankers and the regulators in believing this could go on and on. This is the great unraveling. Enda and the lads only need to sit tight. Cannot wait to see what number will pop up out of the stress… Read more »
Paddyjones you miss the point. we should not be considering paying the bank debt at all. This talk of repaying over longer periods or a rate reduction is just wrong. There is no other word for it. We should not be paying the bank debt. We should, however, be concentrating on the sovereign debt which each and every one of us is responsible for and benefits (in most cases) from. The banks got greedy, lazy and frenzied. They neglected due diligence and should take it on the chin. I find it absolutely ridiculous that we are even entertaining this. And… Read more »
DMcW writes: “The economists forgot about the banks and the private sector and EMU became a financial crackhouse for large delinquent banks in the core of the union and their mini-wannabes in the periphery.” Can someone please deconstruct this sentence and throw some illumination on what David actually means here? And:”Every capitalist who knows a bit of economics also knows that, if you have a system where a bust country can’t pay its private debts, it will endure years of deflation and high budget deficits, which will ultimately get so big that they will have to be defaulted on and… Read more »
A small typo above (p4) ‘fair’ as opposed to ‘fare’ but I like it there…subliminal messaging…hopefully the lads in Brussels will read this!
To all our European partners I wish to see none squirm. Rather I offer the wisdom of Somerset Maugham who observed in “The Razors Edge, 1943”
– Nothing in the world is permanent, and we’re foolish when we ask anything to last, but surely we’re still more foolish not to take delight in it while we have it.
If change is of the essence of existence one would have thought it only sensible to make it the premise of our philosophy.
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David.
It seems that you are nailing the EU insiders for permitting a shadow banking system to operate and use the euro to destroy the PIIGS real economy.
If you are I reckon you are spot on.
And Constantine on RTE primetime tonight came very very close to uttering this point blank.
Germany and France insider elites in tandem with elites in the countries across EU are using the Euro to game the citizens of the EU and shaft the citizens up the Kyber, real good and then make us eat the peanuts outta their shit.
“There is no way out of this because the EMU architects never allowed themselves to think the unthinkable”
Ah but they have – the answer lies on the asset side of the balance sheet.
The Euro was constructed in such a way as to create a crisis – they wish to transfer dollar reserves into this asset.
I am not sure if Spain or Italy will be the trigger.
http://www.irishexaminer.com/ireland/lowry-kept-34k-bonuses-meant-for-staff-149182.html
Well it looks like our goverment are going to be saved from the embarrassment of been force to holding a referendum on the bail out,as the ECB is going to explode from the insice what a bang.
This is my opinion from the United States where I have resided for past 35 years. I, hopefully, can read the crisis with a somewhat mid-atlantic filter for what it is worth. As an experienced Aerospace Engineer (this just means aged and tired, not wise and clairvoyant I might admit!) I have to say that the ad hoc non-designed currencies and fiscal systems of the entire planet are all destined to implode and will be forced to go back to the drawing board. The Euro, which is not a new currency but rather a collage of legacy systems, and the… Read more »
PARTY! I do not know how much we have drawn down on the eu/imf lone. But I am guessing it’s 14 billion. If we draw down the rest in one, go and do not put it the banks we could have 75 billion parties that would be over 18 thousands for every man woman and Child. So lets party while the banks go bust we can pay of the interest for fifty or more years or we could use the 75 billion the invest in industry and then sells good to China. But the partying alone would generate lots of… Read more »
‘Roll Me Over In The Clover Do It Again’ – Rugby song
South Kerry ( Rebels) and North Kerry ( Bardic Norman )are still The Kingdom and have continued to play it out over history and share their Annual Financial Budget and roll along as they say .
The ROI is likewise to follow same .Why bother , why deny your family a good meal because of what you believe in no wonder Healy Rae bacame so popular in the poorer camp because they became so desperate anything would do as long as something worked.
Aparitions The coastal people of all Kerry always looked west into the sea waves when in need .It filled their empty souls and gave them hope and a choice .Where landlords held large swaths of land they pioneered the art of fishing to find alternative.And they did .There was galore of whisky washed up , tons of wheat , galleons of foreign stocks including olives , and weapons and many new breeds of sallow men to fulfill the local lassies. So when you see a Kerry Lady look out to sea as her mother did and her mother now you… Read more »
This is the Kenny doctrine. http://www.independent.ie/national-news/kenny-calls-for-new-eu-cash-to-end-bank-crisis-2594288.html It sounds familiar. Familiar to what is going on in the US – the Paul Krugman doctrine – “borrow, baby, borrow” and the Bernanke doctrine “print-baby, print”. The Krugman doctrine will bankrupt America. The Bernanke doctrine will destroy the US dollar, and the credit system for a generation. Therefore I am sceptical of both these strategies. There are trees somewhere, and this money grows on those trees. We just have to find it….. Actually, in consideration of the lander elections in SW Germany, this is a bad timing by Kenny. But he is putting… Read more »
‘to think the unthinkable ‘ – EU / EMU
The hour has cometh and the pain has touched the torch and the burn increases and the wave flow dislodges and the wind speed increases and the DENIAL continues ….until ( just like FF ) to be no more.
Morning
I thought Constantine was very clear and concise last night on the telly. It seems that the world is moving rapidly in the right direction. Markets are unambiguous but the polticians seem to be playing for time which arguably has got us into the mess we are in.
Best David
Very good article thx. But I think there is possibly another way out of this on the cards. That figure of €763.8 bn owed by Ireland, Greece, Portugal and Spain comes as a bit of a surprise. I would’ve thought the figure to be over a trillion at the moment, but there you are. I thought the big fear was Spain with up to a trillion on the debt cards and the biggest worry at the moment! Up ahead I would be surprised if rather than restructuring or default that EZ will try instead QE as the US have done.… Read more »
Hello David
This is a comment on your previous article. I liked your analogy of Trim Castle and the ‘lines of defence’ of the banks. So did namawinelake! You are featured in the first paragraph in his? article on 23rd March 2011. Namawinelake is heroic and does the public a great service with his blogs by publishing information on NAMA.
A bit off beam David To quote “Have you ever heard the expression “marry me now, the love will come later”? In the old days when a couple was forced together by the matchmaker, this gradual process of emotional osmosis was supposed to happen as time and loneliness took their course. Often it didn’t and, as a result, Ireland was a country of silent homes, filled with psychological terror, violence and sadness.” Let me explain a little bit about the matchmaking process. The parents of the young people that they wanted to marry looked around a lot and there was… Read more »
The markets are putting it to the member states of the Eurozone that the decision to create the Euro set in motion a process that can only have one of two results: the political unity of Europe or, with the explosion of the currency, the effective abandoning of the whole European integration project. Mrs Merkel and Mr Sarkozy have publicly said that they will do whatever is necessary in order to preserve the Euro. Perhaps without realising it, they have effectively committed themselves to European political unity. The Irish debt problem is one of many tests which the Euro will… Read more »
Europe and the EU has just been an excuse for MEP gravy trains. There is no real work going on. Most of the effort of the last 40 years has been focused on Integration, Synergy and providing a playground for wafflers on a range of topics ranging from flower arranging to high tech. The only good thing to come out of Europe and being in the club has been tax payer sponsored tourism for the elite and so called “experts” who are normally failed in the real business or government. Many have developed a taste of good wine and coffee… Read more »
Author: John Q. Public
Comment:
The expression is ‘kicking the can down the street’ for what the politicians are doing. Is it not common knowledge among the banking elites that we can’t even afford the interest on this mammoth millstone around our necks. Those guys are squirming anyway so why don’t they come clean and admit that the paltry few bob we could give them in interest wouldn’t do them any good anyway.
It’s called DENIAL John. Nothing more, nothing less!
It is what the Irish and the world were good at, but it’s a changing………………..Thank God!
ladies, gentlemen,
something i came across today and found very interesting indeed, ballyhea says no
every sunday for the past 4 these people in north cork have been making small waves protesting in their village
http://www.corkindependent.com/local-news/local-news/ballyhea-says-enough/
Lets Think Will the solution we are waiting for be written by the Banks that caused the problems in the first place ? Who else can write it ? The Politicians dont know how to write it .They are been told. Does all of this begin in the secret room of The Federal Reserve ? Has the EMU got a direct line to the Federal Reserve so thay can copy their version ? What Irish Bankers are relevant to write the Irish version of the solution for The Nation ? Is there a conflict of Interest? Lastly who will be… Read more »
If you missed it, PrimeTime Gurdgiev, Cox, Macedo, Shieritz….
http://www.rte.ie/player/#v=1094824
Kenny and Gilmore are wandering around the ruins, waiting for redemption. These are but the latest “Abbots of Austerity” wheeled out in vane to save the old order, the status quo. “If we can cut X then maybe that will appease…….. maybe if we cut Y……or cut some of zzzzzzzzz” What we do know now is the lengths that these rulers of Irish Society were prepared to go to, to retain their privileges. They will bankrupt the Nation to hide their own debts and losses. The ones who cannot hide have cut and run, whilst hiding behind their wives apron… Read more »
It seems our minister Alan Shatter is upset at the the attack on our judiciary, it would be more in line for the minister to investigate some of the crap decision that our so called judges have made.Like taking homes off families because they cannot sell or pay there mortgages, of course our so called judges likes to overlook the fact that “it was the banks” that caused the total wipe out of the economy and the destruction of the property market. This is the same mentality coming from the crooked trilogy of the Banks, and there buddies the judges,… Read more »
The euro is overvalued by 20% versus sterling, why is this never mentioned ? Irl loses the most.
Extraordinary Breakthrough : In advance of the forthcoming summit in Adare on Monday traffic is already increasing and becoming heavy and nobody is talking to explain why.This is not unusual as the main street in Adare has been renown as the street of the squinting windows and instead of old haggs sitting at the windows there are foreigners sitting in the front gardens of the cottages drinking black coffee and looking on.Many carry large bags strapped around them.There is a feeling in the air that something is happening and small sparrows are singing just as did Edith Piaf in Paris… Read more »
bloggers here minht find this article interesting, an anaylsis of all financial crises in since ww2 and the current crisis. They expect about another 7 years of hard times based on the data trends. By Reinhardt, University of Maryland http://www.kansascityfed.org/publicat/sympos/2010/2010-08-17-reinhart.pdf
Another notable finding is for unemployment. For 10 of the 15 countries experiencing severe crises (before 2007) unemployment has never dropped to pre crisis lows. In all of the 5 developed countries, Norway, Sweden, Japan, Spain and Finland unemployment has never gone back to pre-crisis lows.
So its a big challenge to get Ireland back to our pre crises unemployment lows even in the next 30 years.
Euro Strengthens as Inflation Accelerates; Fed Official Suggests Rate Move…
The 17-nation currency pared gains after comments from aFederal Reserve official fueled speculation about the timing ofpotential U.S. interest rate increases. The dollar weakened asfewer Americans filed jobless benefits applications last weekbefore th….