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All of it could be coming to a head this week. In simple terms, investors want higher interest rates to underwrite what they perceive as riskier debt. The higher a country’s borrowing costs, the more necessary it becomes to impose greater austerity measures. Austerity measures make it difficult, if not impossible, for a country’s economy to grow. Without growth, paying higher interest rates becomes unsustainable. The possibility of unsustainability, aka default, pushes interest rates even higher, and the cycle becomes self-reinforcing.
Where is it leading? On Sunday, it was announced that France and Germany are attempting to put together a Stability Pact, with a treaty outlining strict deficit rules and control rights for national budgets in the hopes that it will persuade the ECB (which cannot directly finance governments) to increase government bond purchases. If it comes together, it may be implemented at the beginning of next year. In addition, Germany is pushing to change the EU treaty. They want the ability to sue in the European Court of Justice any countries that break EU budget rules. All of this is a follow up to a proposal made by the European Commission last Wednesday. They want the power to approve EU zone national budgets–before they are submitted to the national parliaments.
What does it mean? At the very least it means that economic decisions made by national parliaments will be rendered meaningless. They either get it “right,” or they get sued. It likely means that Angela Merkel, the one politician with the guts to prevent the same currency-debasing quantitative easing that is ruining the dollar, has seemingly lost that battle. It may even mean that a “two-tier EU” will emerge, in which countries either abide by supra-national rules of finance, or they will be on the outside looking in.
That may be the entire point of this latest exercise. Certain nations (read Greece and Italy at the present time) may be faced with a “lesser of two evils” choice: an effective loss of national sovereignty, but the ability to continue borrowing from the ECB, or independence–and national bankruptcy.
No matter how this latest development plays out, one reality remains unalterable: the entire EU is “running out of other people’s money to spend.” And the so-called little people, long used to a level of salaries, benefits, services and entitlements which are mathematically unsustainable, are immersed in the same kind of denial that afflicts the bankers and politicians who engineered the debacle in the first place.
Furthermore, the dirtiest little secret of socialism has been revealed. In short, there are no heroes. At the top of the food chain, there are those suffused with a breathtaking arrogance rooted in the belief that a handful of the “right” people can out-think millions of ordinary Europeans acting in their own best interests, and create a utopian paradise. They further believe that the historically documented wreckage produced by such ideology has only occurred because the “wrong people were in charge.”
At the bottom of the food chain are people who believe they are entitled to a “fair share,” irrespective of their own effort, ambition or talent. They also believe that any economic disparity between them and their fellow man is de facto evidence of injustice, and that economics itself is a zero-sum affair: they are only “down” because someone else is “up.”
All of it is reaching critical mass. Moreover, Americans should pay close attention. What is happening in Europe is a precursor of where America is inexorably headed if the electorate refuses to make the hard choices in 2012.
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