Tuesday, 9 August 2011

Euro on the cusp

I underestimated the lengths the EU would go to preserve their sacred Euro. Forcing the ECB to buy up huge quantities of Spanish and Italian bonds, up to €200 bn, is a high risk strategy. Trichet is not keen on this and it shows clearly the ECB is not an independent central bank like the Bundesbank but is subject to political control from Brussels. This truthful exposure will not go down well with the Germans who hate inflation after they suffered a total wipe out of their currency and savings in 1928 and 1945 at the hands of politicians. There is no way you can pump that amount of liquidity into Euroland without dramatically increasing inflation. That is a solution beloved of politicians since the days of Rome as it enables them to pay off debts in a devalued and debauched currency.

The person who will pay the political price for this is Dr Frau Merkel and the financial bill will have to paid by the German people already enraged at the loss of their beloved Bundesbank for a mess of pottage or should I say ravioli and moussaka. Merkel is now n the same position as John Major after sterling got kicked out of the ERM in 92. She has joined the walking dead!

The EU solution as articulated by the German Finance minister is more Europe. The French are jolly keen on this as it increases their power and the Germans again pay. There is a funny cartoon in Private Eye in which Biggles says to von Richthofen, " You will pay for this" and von R. replies, "Ve Germans always pay". Well I am not so sure Fritz is going to stump up again this time without a very big quid pro quo.

As the FT put it today, "A single currency can only survive if its political foundations offer coherence. The crisis suggests that, in the absence of further reforms, the euro simply lacks the appropriate underpinnings."  Stephen King who wrote the FT piece then goes on to point out how the Rouble area fell apart after the break up of the Soviet Union. That is the other part of the bicuspid that the EU now finds itself on, the break up of the Eurozone.

King finishes, " If the euro is not to share the rouble’s fate, its member nations will have to agree on a lot more than just the level of interest rates. They will also have to create a fiscal framework that allows for cross border transfers, resolves conflicts between creditors and debtors and supports the Bostonian principle of no taxation without representation”. A neat point but who in the EU represents the tax payers? Not the Eurocrats or MEPs for sure. The problem is the EU does not do democracy. It does elitism.

And therein lies the seeds of the next crisis. Just as the seeds of WWII lay in the resentment of the German undefeated army in 1918 so the seeds of the next Euro crisis will be the resentment of the German people having to transfer their taxes to fund the PIGS and if the German's as I expect demand control of the PIGS's tax systems, the resentment of the PIGS populace against their perceived German overlords. Rather than stopping European conflicts the EU may be creating the next one!

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