Friday, 8 April 2011

And then there was one

Green bottles on a wall or little PIGS with dodgy houses there is only Spain left to fall off the wall or have the big bad market wolf blow its hacienda down. There has been endless talk this morning supportive of Spain from the EU, well naturally, but also from apparently independent commentators like investment bank Goldman Sachs' chief European economist opining 'we think the contagion stops here'. Sounds like someone talking their book as they say in the City. I would like to know what Goldman's exposure is to Spanish debt to assess just how independent Mr Nielsen's opinion is.

'Market relaxed about Spanish banks' €100bn plus exposure to Portugal' is the headline on today's business DT piece by one Harry Wilson. Oh really! On top of something like €200bn plus bad debts on worthless Spanish property loans. Both these figures almost certainly underestimate the true size if the economic problem but the commentators are missing the big picture.

This crisis is political economics writ large. The Euro has always been a political project trying to defy economics. The denouement will be played out not in dealing rooms of banks but on the streets of Athens, Lisbon, Madrid and finally Brussels as austerity bites and unemployment rises. This will panic the markets who will rush for the door leaving only the ECB to try and plug a huge leakage of money from the Eurozone. The lender of last resort, the ECB, of course has no money of its own other than the worthless stuff it prints, and is dependent on its German paymaster for its international credit worthiness.

Politics again! Merkel is in severe electoral trouble. As I have pointed out the fault line in the EU is where it comes up against the interests of national politicians seeking re-election. To survive Merkel has to choose German national interests over what good old Biggles would have described as a bunch of dodgy d***s. Think of it as a Stalingrad moment and let us hope it leads to the last days of the EU Fourth Reich hierarchy in their Brussels bunker, bars and bordellos.

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