Last week, a parade of events have set the stage for what may become one of the most volatile economic periods of the 21st century. On Wednesday, Germany, the linchpin nation of the European Union, had a disastrous bond auction, raising only $5.2 billion of the $8.1 billion it expected to raise. On Thursday, Portugal’s debt was reduced to junk status. On Friday, Italy’s borrowing costs soared again, reaching their highest levels since joining the EU. Belgium, which has been unable to form a government for 18 months, had its credit rating lowered from AA+ to AA. Spain, where the People’s Party will be forming a government in the coming weeks, may apply for international aid to maintain its solvency. In short, the EU is going to hell in a socialist hand basket.
Yet it is precisely the denial of that odious reality that prevents any real progress from taking place. It is a denial born of ideologically-inspired hubris, economic illiteracy, and an entitlement mentality that afflicts everyone from the top of the so-called economic food chain to the bottom. It began with the fantasy that nations with completely different cultural values could be yoked to a common currency, primarily for the purpose of preventing another World War. It was viewed as a way to prevent Germany from ever again becoming the dominant force in Europe.
It hasn’t worked. It is Germany that has blocked the European Central Bank’s (ECB) effort to make massive “eurobond” purchases from Europe’s debtor nations. Last Thursday, Chancellor Angela Merkel reiterated that the ECB was only responsible for monetary policy. This stance sets her apart from the rest of the EU leaders. They want the ECB to do what Ben Bernanke and the U.S. Federal Reserve have been doing: “quantitatively ease” their way out from under, by financing debt with more debt. This is the socialist-inspired “too big to fail” scheme that keeps the banks and markets afloat while they look for a soft landing. A soft landing that ostensibly gives debtor nations time to get their acts together, lower their debt-to-GDP ratios, and regain some measure of solvency.
Such a scheme brings us to the other end of the fiscal food chain. This is the end, in countries like Portugal, Ireland, Italy, Greece and Spain, affectionately known as the PIIGS of Europe, where the bottom end of the chain, aka the “little people,” will be forced to endure years of austerity in order to realize such a transformation.
It’s a transformation that has engendered chaos. In Italy, riots broke out earlier this month when the new government, led by technocrat Mario Monte, outlined reforms to dig that country out from under $2.6 trillion of national debt. In Greece, the latest of many riots occurred last Thursday when workers at the country’s largest power company, PPC, clashed with police. They don’t want to be tasked with collecting property taxes via electricity bills, in a country notorious for tax evasion. Yet Greece needs $10.7 billion by Christmas, or the country will run out of money. Furthermore, their newly-formed government has yet to agree on terms for a far larger bailout of $174 billion, necessary to maintain national solvency.
On the same day in Portugal, a major strike engineered by the nation’s two largest trade unions took place, due to public outrage over austerity measures there. Portugal needs $104 billion of bailout funds. In Spain on Saturday, thousands of demonstrators massed in Barcelona to participate in a planned anti-globalization rally. As a result, border controls made unnecessary by integration into the EU were reinstated to prevent outside agitators from entering the country. And in Britain, a public sector union strike is also scheduled for this coming Thursday, because the government is proposing to raise the retirement age and increase employee contributions to their pensions.
While the peoples’ anger seems justifiable, there is something missing. It is their inability to recognize that they are every bit as responsible for the current crisis as those they seek to blame for it. Ironically, both ends of the fiscal food chain have enabled each other’s demise. It was the massive amounts of credit issued by lending institutions at the top, who made billions of dollars by making easy credit available to the bottom end of the chain. It was the easy credit that enabled the socialist government spending sprees that quickly, but artificially, raised the living standards of people who were more than happy to live the good life, even if it was built on a mountain of accumulating debt. It is that debt that has now become unsustainable, putting both ends of the food chain on the brink of insolvency in the process.