I wanted to follow up on my last article regarding the Euro (see The Euro Is Dying
) because as much as I talked about crosses with the Swiss Franc, the dollar, and spreads in bank funding rates, there is another dimension that has largely gone unaddressed. I'm talking about social mood. Because it strikes me that while the debt burdens of the countries at the greatest risk of defaulting on their debt is perilous and ultimately unsustainable, there's more to it than that.
Dr. Don Van DeVenter from Kamakura Corporation once told me “companies default because they have
to, but countries default because they want
to.” Indeed, if the ECB came out tomorrow and said they would provide unlimited liquidity in euros in order to funnel that cash into the broader European economy, a bunch of the tension we see in the markets would go away. If Germany, France, or the Nordic countries issued more sovereign debt to help finance the debt burdens of the periphery European countries, this issue would go away.
But the problem is, nobody wants
to do that. This isn't One Europe anymore.
The euro was established January 1, 1999. Think about the social climate in 1999: Communism had been defeated, the world was at peak economic growth and along with that, had a very positive social mood. Indeed, with the dot com bubble in that period, it was commonplace to hear people talk about “new paradigms” and a “new economy” where the Internet would help power growth for the foreseeable future. That somehow we transformed ourselves so much that we had defeated thousands of years of human behavior and that cycles would no longer exist. A foolish view this was.
I came across a couple of great pieces from The Guardian
that really put the social mood in perspective. Martin Kettle writes
“Last month, during a rip-roaring lecture at the Hay Festival, the historian Niall Ferguson observed
, almost as an aside, that our generation is "of course" living through the collapse of the European Union.” An interesting observation. And I think it's the correct one. The EU was a concept that was started following World War II. From the period of 1945-1959 (emphasis, mine):
The European Union is set up with the aim of ending the frequent and bloody wars between neighbours, which culminated in the Second World War. As of 1950, the European Coal and Steel Community begins to unite European countries economically and politically in order to secure lasting peace. The six founders are Belgium, France, Germany, Italy, Luxembourg and the Netherlands. The 1950s are dominated by a cold war between east and west. Protests in Hungary against the Communist regime are put down by Soviet tanks in 1956; while the following year, 1957, the Soviet Union takes the lead in the space race, when it launches the first man-made space satellite, Sputnik 1. Also in 1957, the Treaty of Rome creates the European Economic Community (EEC), or ‘Common Market’.
It is important to note that one of the biggest backers of this “United States of Europe” was, in fact, the US. Eisenhower spoke of this concept mostly in the context of the Cold War between the US and the Soviet Union, but the premise was simple: Europe needed to be rebuilt and unified against a common enemy: communism. NATO was established to make this concept more concrete: European nations would be re-armed for the expressed purpose of defending the continent against a Soviet invasion.
Other institutions like the World Bank and the IMF were established at or around the end of World War II to help with reconstruction of the world's economies because at its core, the recognition was made that poverty and disparity are major factors that play into the build-up of armed conflict. But make no mistake: the World Bank and IMF were definitely carrots used to develop countries so that they would not look towards communist ideology as a solution to their problems. But looking at the Greek situation now, it is the IMF that draws the most ire from Greeks. Not the Germans, not the French, and not even the banks. A globalist institution, with its austerity measures and commensurate checkbook, is the symbol that the Greeks are protesting in the streets. The one Europe, one world view is over.
As Carne Ross opens in his article from The Guardian
With its language of budget cuts and bailouts, the sovereign debt crisis that is now engulfing Europe's economies appears to be a financial crisis. But it is also, and perhaps foremost, a grave political crisis about the postwar European project itself: the European Union. And just as a Greek default will echo globally, the EU's political crisis carries resonance beyond Europe's own unhappy shores.
Ross continues (emphasis, mine):
Greek voters are resisting the savage austerity cuts demanded by the IMF and other creditor countries – particularly Germany – to bring Greece's enormous debts under control. German voters are increasingly hostile to the bailouts, paid for by them and taxpayers in other creditor nations, to keep the Greek government solvent.
Further afield, citizens in both creditor and debtor countries, whether Finland or Ireland, the Netherlands or Spain, are turning against the obligations required of them by the crisis – to accept painful austerity, or to pay for others' debts. Their hostility is understandable: few voters understand why policies imposed by distant institutions like the eurozone finance ministers, or the IMF, should be respected as their own.
Definitely not the sound of a world unified, is it? Which takes me back to Ferguson's comment: “of course” we're witnessing the end of the EU. NATO has floundered since the first hammer took a chunk out of the Berlin Wall; its raison d'etre no longer existed. It suddenly lost purpose. The fallacy is that here we are, 20+ years later, talking about it like it still matters. The reality is it doesn't. The EU by extension is no longer the relevant body that it wanted to be or used to be. After all, the dog has caught the car. Now what?
Can we say the same for the World Bank and the IMF? I don't know. They both fulfill pretty important missions to the developing world, which gives them a new purpose besides post-war reconstruction. And given that they are not organizations devoted to the build out of national or regional defense forces, it's easier for them to repurpose themselves to fill new functions.
As for the EU and the euro, social mood there tells me people on the continent want more autonomy. They don't want to be held to Maastricht treaties and trade agreements, or some other decree that comes from a foreign place. They want to write their own chapters in their nations' destinies. A new emphasis on locality is taking shape. From the use of Foursquare to explore your neighborhood to working with local governments on pressing issues, there's a greater emphasis these days on things that are close to home versus things that are happening in some other part of the world.
Does that mean the euro is going to collapse tomorrow? Or next week? Or next month? I'm not sure. I'm not smart enough or dumb enough to put a timetable on something like that. But given the rhetoric, the protests, and the struggles in getting to this point, it seems to me there's a growing portion of Europe's population that doesn't want the euro around for much longer.
And going back to Dr. Van DeVenter's quote, it seems to be getting closer and closer to the tipping point where countries will want to default
. After that? It's anybody's guess what happens next.
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