Generally, if it looks like a duck, if it waddles like a duck
and if it quacks like a duck, then you can be pretty sure what it is… unless of
course you specialise in the ancient art of polishing words to a fine lustre
that has long been mastered by central bankers and economic policy makers,
especially in Europe and so making them look like one thing but actually meaning
another.
Europe’s problems, which seem suddenly to have caught the
world’s attention, stem from trying to make silk purses out of sows’ ears and
then trying to convince the rest of the world to buy into this fraud. Greek,
Italian, Portuguese, Spanish and Irish (GIPSI) debt were never the same quality
as German or even French debt but for the last decade, somehow people took the
leap of faith into believing that they were. They had forgotten the basic mantra
of you cannot have monetary union without fiscal union and for that you need
political union - something that was never going to happen. Let’s remind
ourselves of how Euroland got itself in this mess.
In 1993, despite strong opposition from the United Kingdom,
the Maastricht Treaty came into force mandating at that time for all European
Union (EU) states, other than the UK and Denmark, the creation of an economic
and monetary union by 1999. This was the realization of an idea conceived by the
EU or European Union’s predecessors since the 1960s so, on 1 January 1999, the
Euro was born.
In 2002, notes and coins began to circulate and began taking
over from the former national currencies and, in 2009, the Lisbon Treaty
formalised its political authority, the Euro Group, alongside the European
Central Bank.
In 2011, the Euro’s prospects of survival in its current
state began to appear increasingly unlikely as Greek default started to appear
inevitable, raising the spectre of a chain of defaults throughout European
countries from the ‘Club Med’ periphery to the Germanic core. 2012 RIP Euro?
This is precisely Europe’s problem - by throwing its lot in
with the Club Med countries, Germany has profited from the twin turbo boost of a
highly competitive currency that has fuelled an export boom and an unprecedented
access to borrowing and, therefore, spending power by economies that are now
faced with the dilemma of paying it back.
Greece has been in default more often than not in the last
two centuries and so that it is in default now should be no shock to anyone,
except those who really did believe that the purse was made of silk.
Pretending that Greece, with its 19th and 20th century
history of financial profligacy, which markets had determined should only be
leant money at interest rates of 30% per year, if at all (plus Ireland, Italy,
Portugal and Spain) had the same level of economic risk as Germany was madness
for all concerned.
Right now the pain for this folly is being felt by the people
of the GIPSI nations. But it won’t simply end there. Remember the domino theory
of communist contagion in South East Asia? The economic dominoes of European
sovereign financial systems are in real danger of knocking each other over.
When Deutsche Bank chief, Joseph Ackerman talked recently of
needing to recapitalize European banks to protect the smaller ones, what he
really meant was that the whole system needed shoring up so as to prevent the
collapse of Deutsche itself which is rumoured to have almost gone under in 2008
and whose very survival today continues to hang by a thread along with many of
the French, Dutch and Belgian banks. No wonder money continues to pour across
the borders into Switzerland - people want to park it somewhere they believe
that it will be safe and in a currency that they know will still be around in a
year or two.
All the problems that I warned about before look like they
are now coming home to roost exactly as expected and feared. Yet again, history
has been ignored. Previously, I stated that Italy was a relatively young nation
that was still struggling to assert a national cohesion that can impose itself
beyond the extremely strong and potentially divisive cultures, histories and
identities that make up Italy’s different regions.
Just in case we forget, Italy is 150 years old. Putting this
into context that means that it was actually called into being the year after
Battersea Dog’s Home was founded. Mind you, the high testosterone yapping of
disparate alpha dog Italian politicians of all colours since then could easily
be confused with the noises that have emanated from South London’s famous canine
shelter for the last century and a half.
And yet, Italy is increasingly emerging as the frontline in
the battle for survival for the Euro currency, the European Central Bank (ECB),
the European banking system, the EU itself and ultimately the European economy.
Italy is the world’s third largest sovereign debtor and,
consequently, it was always clear to us that this was where the battle would be
fought which would determine the success or failure of the Euro project.
The problem was that while Greek, Irish, Portuguese and even
Spanish debts were to a large extent manageable because of their smaller scale
and because of the ability of the ECB/IMF/EU/EFSF to bribe and bully the smaller
nations, Italy would be a bridge too far.
This seems to be very much the case. And yet a report by the
Bank for International Settlements (BIS) last year indicated that this need not
be the case. After all, Italy’s problems could be more easily solved than those
in many other countries. Whilst its debt levels were too high, it could turn its
deficit into surplus simply by: cutting expenditure, increasing taxes, reducing
corruption and illegal economic activity, improving transparency and increasing
productivity.
Italy could cure its deficit, if it could do all of the above
but if it could do these things, it wouldn’t be Italy and it would not have a
deficit. It is quintessentially Italian to agree a deal with the Troika to see
Italian bonds being bought in return for promises that Prime Minister Berlusconi
is happy to renege on within a matter of weeks and then, in the face of EU
displeasure, turn and ask China for help instead.
Will Italy buckle down and sort things out? Nah! You might as
well ask Italians to stop driving fast cars, wearing sharp suits or eating pasta
- all things which are equally as much a part of Italian life and ain’t going to
change simply because European, and in particular German, economic survival
depends on them. Mama will still be serving pasta next year when the highly
efficient technocrats of The Bundesbank are desperately pre-occupied with trying
to find a way to avert German national bankruptcy. That is why the Euro in its
current form is doomed to fail. And that why a duck will always be a duck in
whatever shape or form it comes in.
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The above data and research was compiled from sources
believed to be reliable. However, neither MBMG International Ltd nor its
officers can accept any liability for any errors or omissions in the above
article nor bear any responsibility for any losses achieved as a result of any
actions taken or not taken as a consequence of reading the above article. For
more information please contact Graham Macdonald on
[email protected]
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