The economies of the eurozone desperately need to start growing again, but the very currency that binds them is also acting as a straitjacket to growth
Do you want to know what bank recapitalisation looks like? I am sitting opposite it right now. It looks like two well-heeled French bank executives, in matching rimless Armani glasses, scanning spreadsheets nervously in the foyer of the swanky Bonnington Hotel in Dubai.
They are here looking for money. They have been sent here from Paris to get cash from the Arabs. This is the human face of the mad grab for cash that is going on all over the Gulf as Europe’s bankers turn to one of the few places in the world with enough money to bail them out. Obviously, the French will hope to have bagged the swag by midweek so that their clubbable chairman can clear his throat and announce solemnly on RTL that the bank is ‘‘well capitalised’’.
This is what Europe has come to – down here in the Gulf with the begging bowl looking for capital and prepared to give almost anything away to get it. This is the endgame, and Arab money alone won’t solve it.
A few years ago, this column wrote that the euro would split up because of the inconsistencies of having a currency union in an economy that was not suited to it. The inconsistencies are not limited to the fact that there is no political or fiscal union, but extend to the deep demographic, cultural and industrial divergences that are so wide that no amount of integrationist cheerleading from Europe’s elite can possibly mask them. Of course, questioning the euro back then was tantamount to treason – a bit like questioning the property jamboree a few years earlier.
Anyone in the Gulf with a long enough memory will remember that this has happened before, and the solution to the crisis then, as now, will be massive write-off of debt all across Europe. Without debt write-off, we will get political and social implosion.
Make no mistake about it – Europe is the Argentina of the global economy. By this, I mean what is happening in Europe now is exactly what happened to the emerging markets in the 1970s and 1980s. The common denominator in each episode is oil and the Gulf. If you want to know how the world works at a certain level, all you have to do is follow the money.
In the 1970s, the first oil shock led to a massive transfer of wealth from the West to the Arabs. The Arab economies (out-side of the oil industry) were too weak to absorb all this cash, so they deposited it in the international banks. The international banks needed to lend this to someone, but the Europeans and the Americans were in a recession caused by the very spike in oil prices which led to the Arab windfall. So the banks needed to find other borrowers.
They found what were called then the ‘‘less developed nations’’. These were the commodity-rich countries like Argentina, Brazil, Mexico and the likes of Zaire. These countries proceeded to blow the cash on all sorts of stuff, such as the 1978 World Cup and the epic Rumble in the Jungle, for example. Anyway, whatever it was spent on, when the creditors looked for their money back, there wasn’t any. Citibank – the biggest lender – was bailed out by the US government, and the eventual solution involved massive debt write-offs. These write-offs were made legitimate by the US government’s Brady Bonds scheme, which swapped old debt for new debt and the old creditors took a massive loss today in the hope of being paid something tomorrow.
Crisis over. I spent some time working in this Brady Bond market for the very same French bank that tonight is being represented by my two neighbours wearing Prada and sitting across the opulent foyer. What interested me was the fact that the banks that had been burned by the likes of Brazil and Argentina didn’t walk off in a huff after they had been told that they would not be paid back. On the contrary, they were fulsome in their participation in the new debt market. If you want evidence that the market has no memory, it should be this.
The Arabs were paid in full by Citibank – with the help of the American taxpayer. Today, oil is again a factor in Europe’s debt crisis. Again we see the massive increase in the price of oil from 2000-2008 filling the Arab world with money. This time, much of it was spent at home. As I look out my hotel window at this gleaming new city, it is easy to see where it went. But like the last time, this new cash also injected liquidity into the global economy, and Arab money went looking for a home.
One of the homes was, of course, Europe, and particularly the eurozone. As the Arab money linked up with cash from German savers, it created a wall of credit, which was lent out to fuel the Irish property boom, the Greek budget deficit, the Spanish condo craze and governments all over the eurozone. In fact, almost anyone who wanted cash could get credit. The banks thought they were invincible. Then – at its most simple – someone asked for the money back and, lo and behold, there was none. Initially, Germans asked for money back that they had lent to Ireland, and discovered that they owned a ghost estate. Now that experience has been repeated and the lenders – both European and foreigners – realise that they are not getting their cash back. It’s all spent. It’s all gone. So now the share prices of banks have collapsed as investors understand they are not getting their cash back.
Equally, even if Europe does come up with a Brady-style plan, the missing ingredient is growth. Without economic growth, no debt deal will work because only growth in the future will pay off the debt. It is beginning to dawn on everyone that the euro is a straitjacket. It makes weak economies like Greece too expensive so they can’t export enough, and it makes strong economies like Germany too cheap so they export too much.
The currency reinforces the initial inconsistencies. The only way out is either a United States of Europe, where Germany pays the bill and calls the tune, or the reversion to national currencies.
The banking crisis is only the start of this long process. In a sense, the French bankers here in the Gulf are only fooling themselves if they think that a few hundred billion dollars of Arab money is going to solve the problem.
This is a problem at the heart of Europe, and its outcome will define the European Union for a generation. Without growth there is no EU and with the euro there won’t be enough growth. The currency that was supposed to gel Europeans together is driving us apart. When will the penny drop?
PIRATES or… Scooping the political capital Preacher man no tell meâ€¨Heaven is under the earthâ€¨I know you don’t knowâ€¨What life is really worthâ€¨Isn’t all that glitter is goldâ€¨Half the story had never been toldâ€¨So now you see the lightâ€¨You stand up for your rights Robert Nesta “Bob” Marley 1945-1981 – Peter Tosh (Winston Hubert McIntosh – Grins) 1944- 1987 It was the last song Bob ever performed on stage 31 years ago. x x x x Exactly one months ago OWS started. What has been achieved? What are the dangers? What are the future options? It has to be said… Read more »
If they want to recapitalize the banks, why don’t they deposit a certain amount into the accounts of all depositors. Money to the people first, and, through the people, to the banks. You could even have a rule that the money must stay in the account for at least one year.
David, Synchronous trip to Dubai so :-) The banking / financial industry are *addicted to eazy money*. They will do anything to keep the eazy fake money good times rolling. Its become a crisis of mental derangement at the top. The article defines the crisis reality a-z and brings it up to the here and now. The game players though are bent on preserving their hollywood glamour lifestyles though. And they are, so far. WIll they hand in the keys of their Gulfstream Jets and get the bus. They will go down with the titanic before that reality ever even… Read more »
Good line from Rob Parenteau
“Or, as economist Jan Kregel put it in very clear terms, if Germany wishes to run a sustained current account surplus with the periphery, Germany can chose to accept either liabilities issued by the periphery, or tradable goods provided by the periphery, but they do not have the option of choosing neither.”
The United States of Europe with Germany in the driving seat will be politically difficult to sell.
To dissolve the Eurozone in a globalised world makes no real sense-common currency though needs a solid financial structure behind it for credibility. It’s Hobson’s choice David. MJH @mumenomics
David, the best article yet on the EuroZone preference for cake over bread.
I agree the Germans will have to dig deep and pay up to save the euro or else the euro is history, my question to you is this in your opinion will they pay? Or is the euro history?
Sheik Rock & Roll All those heavy smoking French Bankers in the foyer of the Bonnington Hotel are only meeting ‘middle men’ . The real donors of the money are inaccessible to them .I worked for such middle men before during the late 1980s and our donor was Sheik Zaid of Abu Dhabi .There is no money in Dubai and never was and it is only a talking shop . During the 80s Europe was expanding and GNP was increasing and the Arabs wanted a part of that .That is not the case today so I believe the Arabs will… Read more »
Were it not for the euro my mortgage interest rate would be 7%, 8% maybe more. The problem is that politicians want to spend more and more and borrow to do this , they are weak . The prudent thing to do is to live within your budget and everything would be fine , this is the solution. Austerity => balance budget => repay debts This is the road we are on and I say get there as fast as possible , sack 50,000 public service workers , cut social welfare increase taxes to EU average , get the debts… Read more »
Soros said the problem centered on the fact common currency without a common treasury with divergent political beliefs as how to create growth dividing any chance of focused effort to resolve the liquidity crisis. There is only one choice for Europe within a fractional reserve banking model and that is the Guro where all good little Europeans do what the Germans tell them to do to hold the fiscal line. Unfortunately the Germans only believe in growth through austerity and inflation is not permissable. So the Guropeans will have to find markets outside the Gurope. And they may as well… Read more »
The key as always in these articles is the final line “Without growth there is no EU and with the euro there won’t be enough growth.” The increasing number of commentators who are pointing to what I thought was glaringly obvious “There is a serious problem with economic growth from here on” The reasons can be analysed and argued but the existing global financial model is based on economic growth ” without economic growth no debt deal will work because only growth in the future will pay off the debt.” The politician who announces no economic growth is also announcing… Read more »
The caption says ‘When will the Penny Drop ? .
Its falling and the real question is when will it hit the bottom ?
Pennies don’t drop, they get pocketed.
“They have been sent here from Paris to get cash from the Arabs”. Who are these ‘Arabs’? Unforuntate turn of phrase.
More gibberish from McW. Now it’s apparently the Arabs that gave us the credit for the building boom !! Arguing that the Eurozone will fail because of cultural, deomgraphic and economic differences between the states of the common currency ignores the massive cultural, demographic and economc differences between US states who use a common currency despite their massive differences (anyone who thinks California, Iowa and Texas are “the same” has never been). The reality – harsh and all as it is – is that there is no easy solution, there will be no break up of the eurozone, deposits in… Read more »
When you recapitalize bi banks you are recapitalizing lending for boom and bust, but mostly for financial speculation, moving capital around the world in huge sums without that capital staying anywhere long enough to be used by any operating companies and business growth and consequent job growth.
So “the answer” to all of Europe’s problems is to fuel the job destruction machine through austerity and the recapitalization of speculation-drunk banks.
We are truly living through the Mad Hatter’s Tea Party.
The description of the french desperatly looking for money from the Arabs is true. John Bruton was over there a while ago too. Oil rich countries will get richer, its a trend. We may see more strife in the middle East, Iraq was about oil. Dictators were tolerated cause they were selling off their oil on the cheap. Look what happens to countries who refuse to sell oil on the cheap – Iran and Venesuela. They get ostrisied. We need to get alternative energy going soon. The occupy protests raise pretty much the same issues that have been bouncing around… Read more »
The global economy is working its way through another cycle of Creative Destruction. Society will survive although for many it will be painful, and this pain is being voiced at the moment on streets across the globe. We need to innovate to generate the growth which is required to complete the cycle. Our government should invest heavily in this innovation and also provide support for individuals who are bearing the brunt of the the current pain, and who will be required to support the growth when it returns.
‘the French bankers here in the Gulf are only fooling themselves if they think that a few hundred billion dollars of Arab money is going to solve the problem’-History will simply repeat itself if we go down the same old route again. It would be less worrisome if the ECB engaged in large scale quantitative easing and supplied European banks with the cash they need instead of the banks borrowing from Arabs.
Oil fuels growth, but also keeps what has already been built running. Today, OPEC can still keep their supply up with demand, but not at prices that are friendly to growth (along with the rest of the world’s big oil producers), and they know it. Some day soon, prices of oil will won’t even be friendly to zero growth, because let’s face it, oil is not a renewable resource.There will be no bailouts from the Arab world that doesn’t take this into account. Even with a restructuring of the entire euro zone, if they ignore the effects of energy depletion… Read more »
This is begining to sound like John Maudlin’s Endgame (unfortunately, I will not have time to read it for at least one month). Not impressed with the Euro Fudge. FIAT – Fix It Again Today. The Euro is a paper currency based on the FIAT principle. We have seen the “Fix It Again Today” approach to the Euro, for about 18 months. Every fix lasts a short while, then there are more problems, and we find out that it was not really a fix at all. There is only one fix. The rich have to take the pain. But that… Read more »
This is an excerpt of a debate in the European Parlaiment. Nigel Farage, lambasts Juncker for completely ignoring the plight of people who are being asked to make sacrifices for the sake of the lobbyists who get policies that they want from Brussels. http://globaleconomicanalysis.blogspot.com/2011/10/nigel-farage-calls-juncker-political.html Note : when Juncker completely ignores Farage’s points, and questions – the rest of the MEPs make a loud continuous round of applause in support of Juncker. In the Irish media, and particularly with reference to Pravda, we are instructed that Farage is somebody who is completely untrustworthy. We even had a spat between Dick Roche,… Read more »
[…] full article at source: http://www.davidmcwilliams.ie/2011/10/17/when-will-the-penny-drop […]
The only penny I want to hear dropping is the realisation that the financial markets must be shut down. There is no possible solution to this global crisis while they are operating. The tail is so obviously wagging dog it beggars belief no one seems to see it.
Have a read of this.
Very interesting article from Mark Weisbrot, looks like Obama’s job stimulus won’t get past the political process and if it does it is too small to achieve anything. “For all of our political leaders’ spectacular failure — the lack of leadership from the White House and the successful economic sabotage of the Republicans — we can give special thanks to the major media. With a handful of exceptions, they have been the great enablers throughout this malaise, lending credibility to ridiculous arguments that America is constrained by a “debt crisis”. The federal government’s net interest payments on our public debt… Read more »
[…] David McWilliams Â» When will the penny drop?. October 17, 2011 […]
Should be listened to as we watch the market system, championed by so many, crush people before our very eyes.
For the unemployed, the sick, the disabled, the penny dropped a long time ago.
The current global ponzi scheme is reliant on growth.
Austerities strangle growth.
Those applying austerity know this.
1+1+1 = ?
When will the penny drop? Anyone remember the 1960s when Irish currency was freely exchangeable with Sterling? Well, our old pre-decimalization friend, the copper penny with the hen and chicks would now be worth five cent, just as scrap metal, so a Euro is now worth about 1s. 8d. old style. That is to say it would take about 20 Euros worth of old pennies to make the copper value of one old Irish Punt. When the Euro was introduced we Irish were given to believe that the fair exchange rate was 1 Euro for 0.787564 Punts i.e. about 1.25… Read more »
From what I have heard the oil shock was a deal struck by the Anglo American oligarchs with the Arabs. Oil would be denominated in dollars and the money flowing from the price hike would be routed through the Arabs, as middle men, back into the oligarch’s European and American banks and lent to 3rd world countries at sufficient levels to bankrupt them; with the final prize being 3rd world commodities and resources. And of course they arranged for the losses in their banks to be transferred to the taxpayer. The whole thing was a scam brokered I believe by… Read more »
We need to shut down the financial markets. We need to close all banks which are insolvent.Their are some fine writers on this site but I believe there points are “lost in the fog of war” The Government is irrelevant.Any party can make genuine pre-election promises,what happens is when elected,they walk in all gung-ho and then are taken to one side by Senior Civil servants were the actual truth is revealed and they are given a choice,cooperate with IMF/ECB or Cooperate with the IMF/ECB. At this stage,Governments are caretakers and spin doctors.thats it,they open up in the morning and turn… Read more »
ECB Humpty Dumpty sat on a wall, Humpty Dumpty had a great fall. All the king’s horses and all the king’s men Couldn’t put Humpty together again. EFSF There’s a hole in the bucket, dear Angela, dear Angela,There’s a hole in the bucket, dear Angela, There’s a hole. Then fix it dear Sarkozy, dear Sarkozy, dear Sarkozy, Then fix it dear Sarkozy, dear Sarkozy, fix it. With what should I fix it, dear Angela, dear Angela, With what should I fix it, dear Angela, with what? With a straw, dear Sarkozy, dear Sarkozy, dear Sarkozy,With a straw, dear Sarkozy, dear… Read more »
I wonder will the poor residents of Priory Hall in North Dublin be recapitalised following the eviction orders issued last week.Maybe if they took a trip over to the Gulf and sat in the foyer with David he could introduce them to those French Wankers (sorry Bankers).I doubt the figure they would be looking for,approximately â‚¬3 million, would be noticed in the scheme of things.Or maybe they could they could drop in to Manchester City Football Club and ask fot it there. Ironic in a week where new oil exploration licences were issued by Comrade Rabbitte do we have the… Read more »
As an old guy participating part time in an Occupy effort, this is what I see: Young people galvanized to creep toward a consensus on what to do about a broken financial system, the impoverishment that financial capitalism brings to our and other economies (the 1% vs the 99%), a political system corrupted by special interest and billionaire money, politicians who cannot be relied upon to do anything effective, MBA programs that preach an inhumane version of capitalism, etc. All without relying on political of celebrity “leaders.” The Occupy movement is a generational movement, one that will take years to… Read more »
Great article. Insightful as always. Thanks David
Change of EU treaty ahead?
Really uplifting stuff from RTE this evening, if they don’t get you with the repetitive nine o’clock news, they might get you with the pensions crisis programme courtesy of what’s his name, should we all just die now so we can avoid the ‘kiss of death to the economy’ as one contributor put it, save the economy but finish ourselves off Masada style in the face of the enemy. If after you’ve taken the anti-depressants, you get through that, then maybe, just maybe they’ll finish you off with the third wave, Frontline, from what’s his name. Just as well for… Read more »
CBC News try to copy Fox trash but it doesnt work.
From the article above: ”The only way out is either a United States of Europe, where Germany pays the bill and calls the tune, or the reversion to national currencies.” Yep:Here in Bonn, this is the sentiment among those with whom we are working. There is no appetite for the approach as heretofore; people are taking to the streets countrywide. This feeling is summarised by Dirk MÃ¼ller, trader and und bestseller-author, who writes in today’s FAZ [sic]: ,It would be relatively easy if Germany would leave the Eurozone. But the politicians will NEVER do that. As previously in the course… Read more »
The ridiculous FT announcement – EU ban on ‘naked’ CDS to become permanent The article from today is symptomatic for what is happening since many years now. The headline suggest what? That’s right, shoot more crap against the wall and wait to see what sticks, that’s all really. So the EU parliament, let’s face it, de facto the EPP is throwing up another smoke screen to deflect from the inherent problem. It is nothing but a kite, to pretend to be able to make an impact. This is not going to solve the problem, on the contrary, besides, this is… Read more »
You might be tempted think this is from Kilkenomics
How can broke economies lend money to other broke economies who haven’t got any money because they can’t pay back the money the broke economy lent to the other broke economy and shouldn’t have lent it to them in the first place because the broke economy can’t pay back?
Well, watch for yourselves:
Money is not about Banking and Banking is not about Money . Banking is about Time . Money is a measurement of Time .Broken Economies can lend to broken economies .
I can lend you my bicycle even if I am broke .What do I want ? I don’t know maybe it depends what do you want .
Solving the Euro crisis requisites: 1. Know what you have to do…………but nobody knows what needs to be done… 2. Say “We can do it”…………..but we can’t agree on what needs to be done… 3. Have a plan………………..but we can’t agree on a plan about the unknown… 4. Let us know the plan…………but we can’t let you know the plan because: we really don’t know what’s to be done, nor can we agree on a plan to execute an unknown plan, for the unknown; nor even let you know there might be such a plan, as this would raise, false… Read more »
It was the name given to the state by the population of Czechoslovakia (I think) but it could easily be applied to the entire EU now: Absurdistan.
Well, I think you will all find this interesting. Surprised nobody mentioned it yet. John Mauldin, who wrote a very good book, that I have on the shelf, but have no time to read yet, called “Endgame”. Anyway, he was recently, in Ireland, and spent a fair bit of time discussing the economic and banking crisis with David McW. http://www.marketoracle.co.uk/Article30870.html By all accounts he was impressed with David’s knowledge, and also with the eagerness of various people to sell Ireland as a business location. Also he gave us a very interesting insight into the stuff that is not being said… Read more »
Commodities scam – UPDATE Those of you who know me and what I wrote here in the past will remember that I warned about the inevitable commodity scam that is unfolding. I wrote about Glencore’s IPO as well as Monsanto’s conduct of business. Because this blog here offer so little interaction, I can not even search for my contribution and link it here again for your convenience. On various occasions I pointed out the unethical practices of banks and Investors, whether it is military technology, or the equally evil to the bone, investment games in the commodities such as sugar,… Read more »
The Greasy Till of The Blood Sucking Minister For Penance December 6th has been the date announced for the Austerity Budget 2011 . Lets see who will speak at length the euligy to false logic in the dahl cause his throat will game up on him . December 6th, 7th 8th are the peak dates of the next and last Moon WOBBLE this year . Buy Hot Water Bottles and shoe chains to steady during this weather major crisis . For anyone wanting to understand more into Brady Swaps astrologically speaking here is the reference for past and future :… Read more »
Follow up to couple of posts on this topic earlier that due to the threadbare help to follow different topics on this site, you may have to do some digging to find:) ——— There could be more information given on this site on the negotiating position of the state and what exactly the terms and conditions of these licenses are: This would help end controversy that the state’s terms for licenses are too accommodating for the oil companies against the view, which may be the correct view, that the state has done a good deal securing attractive terms for the… Read more »
David XXX excellent article!!! . “The currency reinforces the initial inconsistencies. The only way out is either a United States of Europe, where Germany pays the bill and calls the tune, or the reversion to national currencies” . I’m all for it, because if what we are looking for is economic growth and technological development, combined with good organisational and administrational skills, they have shown they are the best!!! . But I’m afraid that if that becomes a choice, between it and probably to join the UK and USA in another sort of political and economical block, I’m sure we’ll… Read more »