The US has its separately elected President of the United States while Russia has its Putin. Europe, however, has ministers with overlapping responsibilities, who may or may not be authorized to take any action.
The endless parade of finance ministers in front of microphones, each with a specific sound bite for their own economy while taking pot shots at neighbor’s budgets, is damaging the appearance of unity. In fact, to the rest of the world, Europe appears to be coming apart at the edges.
The soft weak underbelly of the Union has been exposed for all to see. The Union is dissolving into a tit for tat exchange between sovereign finance ministers. Each is now trying to show how strong they are, by showing how weak a sister state is. Some states now want to sacrifice other states in an attempt to regain their own stability.
The core problem is that the EU is suffering from its intentional lack of a central leader. The second major intentional structural weakness is its lack of a central funding mechanism for the bureaucracy itself. These two simple rules, which provide checks and balances to central banks and legislatures, are missing in Europe.
Fundamentally, this keeps the ECB from being able to issue Euro bonds to fund EU financial needs. It also opens up the EU to rogue actions taken by its members, like Ireland guaranteeing their banking system without permission from the ECB or EU itself. One of the ECB’s current fears is that Ireland is going to go rogue and start generating electronic Euro’s to stimulate the Emerald Islands economy.
The buck does not stop anywhere in the EU. The bureaucracy grinds on with, or without, a legal mandate to do so. There are no checks and balances on the system as it exists today.
You only have to look to the different rescues packages that are being hatched to follow the different cross currents in play. When everyone is responsible for bailing out everyone else, what limited *REAL* capital is available starts to matter.
The stabilization fund does not seem to have been designed as a real bail-out fund. As such, with the line of nations that need help seeming to grow weekly, the smaller nations in the EU who are struggling on their own, are looking at larger and larger draws on their own limited capital as a % of GDP.
Austria, with its banks heavily invested in loans in Eastern Europe, does not want to help fund the Irish bail-out. If there is a bail-out, Austria and its banks will need to keep their capital closer to home. This is about sovereign survival, disregarding the effects of a failed EU itself.
“In the financial sector, stabilization has been achieved, as the accelerating rise in lending shows,” he said. “However, in 2011 Austrian banks will have to strengthen their own-capital balances further in order to satisfy the requirements of Basel III and other regulatory measures.”
In Slovakia the conversations are even more pointed, with Slovakia requesting that Greece accept reality and default on its debt. If Greece were to do so, Slovakia would be free from its proportional share of helping Greece with its continued funding.
“I believe that a debt restructuring would be a better solution for Greece,” Slovak Finance Minister Ivan Miklos told the Thema weekly newspaper, according to an advance copy of the Sunday edition.
“I think the (bail-out) loan to Greece was a fatal mistake from the beginning. Setting up the European stability fund was also a mistake,” Miklos was quoted as saying.
But Miklos said restructuring the debt would help Greece more than the bail-out. “Very simply, we do not believe these (bail-out) programs will help overcome the debt crisis that is expanding in Europe,” he said.
“Our refusal to participate in the (loan) for Greece was not a hostile act towards the country. It was an expression of our belief that your economy can be cured more effectively with a restructuring.”
The European Union longer term credibility is suffering from the seemingly endless number of damaging sound bites being released by what appears to be every finance minister on the continent. If press release sound bites were bullets, this would be called an active shooting war. The airing of dirty internal politics and national priorities is going to undermine any attempt at building an economic coalition.
What is clear, however, is that the Icelandic solution is the elephant sitting quietly in the corner of the room. If nations with low national debts, write off their own banking system, organic growth is possible. It just takes the will of the people to speak.
As Claus Vistesen pointed out in his article today at Fist Full of Euros,
“Finally, I crucially assume that you can’t have both austerity and growth at the same time. If you want growth it will cost a higher fiscal deficit and if you to run down the fiscal deficit you must endure deflation (negative nominal GDP growth in essence) and it is this latter which the ECB and EU are pushing. Especially this last assumption is absolutely crucial to understand since it is this situation the periphery faces with an internal devaluation in the euro zone.”
The Slovakian finance minister has broken new ground this weekend by pointing out that the Greek government is naked. What happens next concerning the continued funding of the Greek Bailout will be interesting.
Everyone knows the Greek government cannot service the old debts, let alone the new debts being heaped upon it by the EU & IMF rescues. Slovakia, at least, is not shy about asking why it must help pay for the Greek hangover.
The only question is when is it acceptable for the Greeks to acknowledge what Slovakia has pointed out. Greece is going to be unable to service the debt it already has. So why continue to throw good money after bad? or said another way. Do you want Austerity or do you want Growth? You can not have both.