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The euro crisis: spinning out of control? « Previous | |Next »
September 23, 2011

The IMF is calling on the leaders of European Governments (eg., France and Germany) to bail out their banks again in the context of the growing risk of default by Greece and other vulnerable eurozone countries.

However, the eurozone countries have very little ammunition to confront the coming financial storm that will cause havoc amongst the cowboys and machos in the finance-driven, deregulated economy in which we now live. The euro crisis looks to be spinning out of control and the euro’s survival increasingly hangs in the balance.

On current policy trends, a series of sovereign and banking defaults are unavoidable: the inability to issuance eurobonds; the European Central Bank (ECB) is highly unlikely to be permitted to carry out the full range of lender of last resort functions to eurozone sovereigns and bank---eg., to step in and buy unlimited amounts of government debt in order to demonstrate to investors that their fears over insolvency are unfounded; the slowness of the eurozone governments to move to recapitalise their banks, so that they were better placed to cope with the coming debt defaults.

Then we have the failure to shift away from fiscal austerity even though household and business confidence is crumbling rapidly across the currency union, depressing economic activity, and with it the likelihood of governments meeting their fiscal targets.

The inference from this is that there are sever and well known limits of the eurozone: it has a "single currency" that isn't backed by political sovereignty, a central bank that doesn't act as lender of last resort or finance government borrowing, and no significant European public budget. The flaws of the ECB's obsessive anti-inflationary stand, and its propensity to raise the interest rate whatever the cause of price rises, are also plain to see.

The issue is whether Greece, Spain and Italy are forced to quit the currency union in order to be able to print money, recapitalise their banks and escape deflation.

| Posted by Gary Sauer-Thompson at 3:26 PM | | Comments (6)
Comments

Comments

Well, what was the European Community ever about, than the elites of countries ganging up to impose neoliberalism on their locales and populaces.
As with the USA, what's actually happened has been that government is captured by the commercial elites and the one policy that has supplanted all else has been the organised plunder of western infrastructure, a resource to be expropriated same as the oil fields of the middle east.
The removal of representation and participation from within the masses has allowed the exploitation of the first second and third worlds to accelarate without serious opposition, as media and press spin from the mouthpieces of the system "normalises" the processes in the minds of both westerners and the starving masses who can be be quietly starved or cluster bombed into submission over what we are told is "terrorism", eg resistance.

"the eurozone has very little ammunition to confront the coming financial storm"

Interest rates are already at historically low levels in Europe and countries that once had the cushion of sound public finances are now running big budget deficits. Secondly, There is no unanimity about what needs to be done and the political will to stimulate demand and recapitalise shaky banks.

The economic fundamentals are poor in Europe, confidence is shot to pieces and there is no credible plan for jobs and growth.

The US is not much better. There is the bombed-out state of the housing market and the financial crisis of 2008 has left deep scars of debt, negative equity, and high unemployment. The US Federal Reserve doesn't have the big weaponry to invigorate the US economy.

What is worse is that China's manufacturing output is declining as its demand for commodities from Australia: and China, is not making much progress to change direction and encourage more domestic consumption and fewer exports.

The issues spooking the markets are the threat of a Greek default and the solvency of banks, particularly those in France. There is austerity fatigue in Greece and bail-out fatigue in Germany.

is Wall Street – that is, the financial community – justified in its present size? A main question is this: does the financial sector do more harm than good?

paul,
it looks as if Germany will have no choice but to go along with what the ECB is doing or the euro itself would blow up.

The ECB is the only supranational game in town, and it has little choice but to take on this quasi-fiscal function that it is now undertaking--buying the bonds of those countries on the periphery now facing growing national insolvency.

European Union governments will have to put together a firewall to protect their fragile banking systems against what is now seen as an inevitable Greek default.

Meanwhile the beleaguered Greek government is between a rock and a hard place. It is under immense pressure to make radical reforms in exchange for financial support from the EU, ECB and IMF, but also under pressure from a populace exhausted by the austerity measures that are turning the country into a poverty house.

Helena Smith in the Guardian says:

A new underclass has appeared: in the homeless and hungry who roam the streets; in the spiralling number of drug addicts; in the psychiatric patients ejected from institutions that can no longer offer them a place; in the thousands of shop owners forced to close and board up businesses; in those who forage through municipal rubbish bins at night; and in the pensioners who make do with rejects at fruit and vegetable markets. Suicides have also risen, with help lines reporting a deluge of calls – 5,000 in the first eight months of 2011 compared with 2,500 for all of last year.

With the prospect of austerity for years to come, a growing number of young Greeks are either returning to their rural roots or fleeing to countries that can offer them a job in what is described as the biggest emigration wave since the 1960s.