Friday, October 28, 2011


On October 28, 2011 the EU debt crisis got a shot in the arm. Banks agreed to a 50% loss (100 billion euros) on their holdings of Greek government debt, they have also to raise additional money (106 billion euros) and the EU rescue fund was increased to 1 trillion euros.
The “wait and see game” can begin.

The Greeks will always be Greeks. Expecting them to suddenly become addicted to paying their taxes is a far-fetched naivety. The Italians are running into problems and the interest rates are moving upwards. The European Central Bank remains a Swiftian hybrid which has to do what it wasn’t mean to do. Meanwhile, the personal attacks and tensions amongst member states are becoming frankly unpleasant.

One should certainly hope that the rescue plan will achieve tangible results. The rise of Italian interest rates since doesn’t abode that well. The EU Titanic continues on its dangerous journey, finding itself in treacherous waters.

The crisis has divided the EU into two categories, members and countries which have adhered to the euro, and those who haven’t, which leaves the UK, inter alia, out. This first crack might have large consequences for the future. There is no need for self-flagellation yet, while the plusses still override the minuses. Still, the simultaneous tensions between individual member states, and the larger break in continuity, constitute hurdles that will be hard to overcome. The EU has already lost its soul; it should not lose its engineering skills. The Central Bank needs to be reformed into a body which combines agreed financial and political room for maneuver. The ECB went, fortunately so, out of its way and mandate and intervened when member states stalled when they were supposed to ratify the European Financial Stability Facility. The member states should stop playing “hide and seek”. Countries should be held more accountable and not feel free to avoid pain for little gain. Remember how France and Germany broke the terms of the Stability Pact in 2000?

It is too early to gauge the fallout of this latest rescue given that the street has not had the time to react yet. Likewise, lots of egos will need some time to recover. All this should benefit the clout of the American currency and the creativity of both Wall Street and the Fed to come up with solutions. The end of the economic slump is still far away but the US might still be the first to reach the finish line. The Chinese ‘miracle’ shows signs of a structural weakness. The Russian boom is too messy to last. Hence the US will have to build a firewall against "Greeks bearing gifts” and be more aggressive in addressing their debt. The dollar remains the reserve currency of last resort but it also has to stop playing musical chairs with regulation and deregulation.

For the Europeans there remains the pressing issue of averting a drift between north and south. The member states must converge or the EU risks becoming the next cruise-liner to hit the icebergs which undoubtedly will lie in its way. The new ECB chief Mario Draghi will need a sturdy hand to avoid becoming hostage to infighting passengers or intrusive states. Distraction can lead to a major collision.

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