Eurobondage (Strapped for Cash!)

The notion of a single economy utilizing a single currency – the very premise of the Euro Zone countries in the European Union – seems like a joke in retrospect. Not only is the economic and standard of living as disparate and often at near-polar opposites within the Zone, but some countries – notably Greece – actually fabricated economic performance numbers to support its membership in the EU and the Zone.

Greece currently has no genuine path to repay its $170 billion rescue/EU bailout debt, much less that portion of institutional and national debt that still remains on the books. A new left wing government threatens to renege on that debt, and talks of “drachmageddon” are rampant – where the euro is abandoned in favor their former currency, making it almost impossible for locals to use what will be a highly inflated (valueless) drachma to service their euro-based debt and purchases. Spain and Portugal are also facing severe economic strains, Italy is not too far behind, and the notion of unity is looking further untenable. With Germany arguing as strongly as ever for individual nations to swallow the bitter austerity pill on their own, the question of what the Euro Zone is and why it even exists appears to hover over the EU like a mushroom cloud from a nuclear blast.

In the U.K., which maintains a separate currency within the EU, there was a run on banks several times in recent history, but when the Bank of England (their central lender) stepped in to guarantee the solvency of the deposits (much like our recent stepped up FDIC guarantees during the height of our crisis), the instability settled and the banks remained intact. But the European Central Bank, crafted by inflation-fearing Germans as their “contribution” to the overall Euro Zone structure, simply doesn’t have that arrow in their economic quiver of remedies. Spain’s banks, for example, are teetering, but there is little appetite in the rest of Europe to back these financial organizations. If they fall, they may well precipitate a collapse of what little remains in an economy that suffers from 25% unemployment.

In Europe, the pig-headed unwillingness for Germany to allow a blended borrowing rate for the unitary economic system they voted to create clearly threatens the future of not only the euro and the Zone, but the EU itself. The net impact of failing to at least begin to consolidate some form of overall European borrowing base – the hallmark of a single economic unit – means that the weakest members (whose credit ratings have plunged to ”junk” levels) have to borrow at staggeringly-high rates, and further imperils these countries’ existence as well as the structural stability of the EU itself.

A pan-EU bond would create a tenable borrowing rate for those who have the right to access these funds. But fears from Germany that you “don’t solve a debt crisis with more debt” and “pan-EU borrowing could seriously inflate the euro if member nations default” augur against German support. “German officials remained adamant that there was no way they would bend on collective debt...

“After a focus for months on cutting spending and budget deficits, the discussion has shifted to ways to bolster growth. Many economists and policy makers now say that the surest way to end the crisis is for European states to move toward jointly issued debt, known as euro bonds.

“The sense of crisis escalated [May 22^nd], as the Organization for Economic Cooperation and Development cut its growth forecast for the euro zone and said Europe risked creating a self-sustaining cycle of decline that could have dire effects for the world economy… Depending on the country’s perspective, euro bonds are either an old and particularly persistent rash (Germany and a few others) or an increasingly popular idea for addressing the region’s economic plight (almost everyone else). Although many details would need to be worked out, the idea is to have the euro zone countries collectively issue bonds that would be guaranteed by all 17 members. But the most creditworthy countries, like Germany, would almost certainly have their borrowing costs rise, as they, in essence, would guarantee the loans of their debt-saddled neighbors.” New York Times, May 22^nd. Austria, the Netherlands and Finland side with Germany.

Probably the correct path would be an issuance of euro bonds for very specific and limited purposes at first, as the EU generates more detailed rules on the use of such bonds for other purposes and the relative structures to deal with default, perhaps targeting new and needed infrastructure projects, which will in turn spur job growth that is sorely lacking in the German-mandated austerity programs that have heaped so much suffering in the most profligate member nations forced to take EU bailout money. German Chancellor Merkel leads the German stubbornness movement, but even her political future is very much in doubt.

As much as Germany thinks that most of the rest of Europe needs to swallow its austerity medicine for the foreseeable future, most of the rest of Europe thinks Germany needs to promulgate a new growth policy and take some long-term medicine in the form of slightly higher borrowing rates needed to create that unitary economic structure German helped to create. For economy-watchers worldwide, a simple look at austerity without concomitant growth (another word for “hope”) should send shudders of fear down the spines of the politicians who are hell-bent to kill government spending even if it means the massive firing of millions of workers and the removing government demand from the economic system long before consumer demand is in a position to replace it. Governments that are insensitive to these realities are falling all over the world.

            I’m Peter Dekom, and you can bet that President Obama hopes the Europeans get their priorities out of the “austerity is the only path” movement, because the probable fall of the EU if those no-growth policies continue is a general global economic downgrade, which moves the election more to Mitt Romney’s camp.