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Yet such painlessness has its limits. The longer the EU (and the United States for that matter) “kick the debt can down the road” by underwriting debt with more debt, the more such debt accumulates. So do interest payments that consume ever-greater shares of government budgets. Greater expenditures dedicated solely to making interest payments mean less money for government programs, absent massive tax hikes–or further austerity measures that eventually become unsustainable in and of themselves.
In Europe, the urgency of the crisis stems from the fact that private investors, represented by the European bond market, want higher interest rates to protect themselves against losses. Higher interest rates, or more specifically any yields over seven percent, are seen as the border line above which paring down national debt becomes unsustainable. It is precisely this reality that drove European Central Bank policymaker Christian Noyer to accuse S&P of “becoming a motor” in the current crisis. “When you look at the way S&P formulated its argument, you can see that they have changed their methods,” Noyer contended. “The methodology has become much more political and less linked to economic fundamentals.” This is the same “shoot the messenger” reaction that occurred when America’s credit rating was lowered, despite $15 trillion of debt and no respite from deficit spending.
As of now the EU supra-nationalists retain the upper hand. In the latest effort to placate bondholders, Germany is reportedly ready to “soften the language” in the statutes of the European Stability Mechanism (ESM), the new bailout system scheduled to replace the current European Financial Stability Facility (EFSF) in 2013. It can only happen if the 17 member nations agree to stricter budget oversight, and sanctions for those who miss EU-mandated budget targets. It may even include a procedure for taking fiscally irresponsible nations to court.
Tellingly, it seeks to reduce the liability of private bondholders who got a haircut in the restructuring of Greek debt. Bondholders who feared a precedent had been set where they would be expected to eat substantial losses every time an EU member faced a crisis. This makes them hesitant to purchase more debt–which drives interest rates up.
Nicolas Sarkozy was even more emphatic. “It must be clear that what has been done for Greece, in a very particular context, will not happen again, that no other state in the euro zone will be put into default,” he said. “It must be absolutely clear that in the future no saver will lose a cent on the reimbursement of a loan to a euro zone country.”
So who would replace these so-called savers when they are rendered immune from the consequences of their own behavior? Taxpayers, once again reminding the “little people” that their “betters” are still determined to privatize profits and socialize losses. And it is exactly that attitude that makes any austerity packages, no matter how heartily deserved and/or necessary, an even more bitter pill to swallow than it already is.
The siren song? On April 17th, the True Finns party, who ran on a platform in part opposing taxpayer bailouts of debtor EU nations, became the biggest party in the country despite highly questionable policies in other areas. The equally questionable Marie Le Pen has made abandoning the euro one of the centerpieces of her presidential campaign. Investment advisor and financial columnist Mike Shedlock offers an educated guess as to where such indications are leading. “Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the ‘bail out’ debt foisted on their country to be null and void. That person will be elected.”
European leaders have until Friday to come up with their latest package, one that will placate national interests, even as it renders them moot. The other alternative? An orderly breakup of the EU, devaluation of national currencies to promote growth, and the restoration of national sovereignty. Either choice will engender significant amounts of pain. The only remaining question becomes whether that pain is endured in a future where each country will eventually be rendered immune to the consequences of another nation’s reckless behavior, or whether the threat of “too big to fail” will be the odious glue that binds the EU–and ultimately the rest of the world as well–together.
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