Eurozone Crisis Banking Crisis Break Up Depression or

Eurozone Crisis Banking Crisis, Break Up, Depression. . . or United States of Europe?

The Global Economy Context • 1. Limits to Growth Constraints – experienced as high energy, food and materials costs so that growth is flagging anyway and millions struggle to find enough purchasing power

Limits to Growth Constraints: Liquid Fuels

The Global Economy Context • 1. Limits to Growth Constraints – experienced as high energy, food and materials costs so that growth is flagging anyway and millions struggle to find enough purchasing power • 2. The growing power of the global finance sector/casino – and its effects in politics and financial speculation – huge sums of money slosh around the world into and out of countries and banks looking for safe havens and gambling on outcomes of crises – making these crises worse. .

The Global Economy Context • 1. Limits to Growth Constraints – experienced as high energy, food and materials costs so that growth is flagging anyway and millions struggle to find enough purchasing power • 2. The growing power of the global finance sector/casino – and its effects in politics and financial speculation – huge sums of money slosh around the world into and out of countries and banks looking for safe havens and gambling on outcomes of crises – making these crises worse. . • 3. Uneven development between nations reaching their outer limits and unbalancing the global economy - e. g. The BRICS, particularly China, vs USA and Europe. . and the eurozone crisis within Europe

The Global Economy Context • 1. Limits to Growth Constraints – experienced as high energy, food and materials costs so that growth is flagging anyway and millions struggle to find enough purchasing power • 2. The growing power of the global finance sector/casino – and its effects in politics and financial speculation – huge sums of money slosh around the world into and out of countries and banks looking for safe havens and gambling on outcomes of crises – making these crises worse. . • 3. Uneven development between nations reaching their outer limits and unbalancing the global economy - e. g. The BRICS, particularly China, vs USA and Europe. . and the eurozone crisis within Europe • (4. Ageing society in “developed” countries – more and more elderly people dependent on pensions from the finance sector. . )

What is “the problem” in the Eurozone really? • Current austerity policies treat “the problem” as if it were due to inadequate financial discipline by states. i. e. States have spent too much and not taxed enough so they need to borrow too much. . In this narrative created to bamboozle ordinary people states need to adopt policies which cut expenditure, raise taxes and privatise assets instead of spending and borrowing so much. . . • Only those countries that sign the sado-monetarist fiscal pact can expect to receive aid from the European Stability Mechanism (ESM), the permanent euro rescue fund which will be launched this summer with € 700 billion available. . .

From 2001 to 2007 fiscal deficits were not high

There were however considerable trade imbalances

Germany undermined its competitors • Germany outcompeted the peripheral countries – in the eurozone they could no longer devalue • Before the common currency countries that could not compete with German (and other)imports in their markets retained competitiveness because their separate currencies could be devalued.

Inability to devalue inside eurozone. . . • For example, if Italy was importing more goods from Germany than it was exporting back the lira depreciated against the deutschmark. So, for Italians to continue buying German goods meant more lira had be offered for DM and German goods became more expensive to Italian importers. • By contrast Germans buying in Italy (eg on holiday) got more lira for a DM and so spent more in Italy. Imports of German goods would fall and exports to Germany would rise. • In the common currency zone this adjustment can no longer happen. The peripheral countries are probably 30% overvalued compared to Germany but cannot devalue. Greece is probably 60% overvalued. • For a time the peripheral countries borrowed from eurozone banks to pay for their import surpluses. However that is a temporary solution. • The German economy is undermining the economies of its competitors who are also its customers. This had knock on effects on the property markets and then on state finances in the eurozone

Import Surpluses are Deflationary – purchasing power leaks out of the economy abroad • An import surplus (trade deficit) is deflationary, tending to force down income and prices. More purchasing power is being spent abroad to buy imports than foreigners are bringing in to pay for exports and their holidays. • A leakage of purchasing power out of an economy caused by imports can be offset for a time by people borrowing new bank credit money, particularly if bank credit is cheap, as it was in the first few years of the eurozone. It also helps if households or firms have savings to run down to pay for more than they are earning. • After the 2007 crunch that was no longer possible. Companies and individuals saved to pay off debts instead so incomes fell as people spent less at home and abroad.

After 2007 – the global crash morphed into a problem of state finances • Falling incomes created government deficits as taxes fell and welfare and unemployment benefits rose. • The import surplus made state funding even more of a problem. Healthy domestic businesses from which tax revenues could be raised are less while welfare and unemployment benefits tend to rise. • This added to the fact that over the last decades most countries had reduced taxes on the rich, on property and real estate and put taxes on ordinary people and labour instead. • At the same time broken banks passed their property market losses over to governments.

Governments inherit the debts of banks broken when a property bubble crashed • • In several countries (eg Ireland Spain) a real estate bubble developed up to 2007 because there was still money to be made in building houses, infrastructure and to some extent holiday homes. Migration was high and credit in the new eurozone was cheap. EU funds were available for the infrastructure. Local government often encouraged land development because their revenues were then higher. If rising land values had been taxed away this would have discouraged speculation and helped resolve the fiscal crisis but property taxes were reduced and taxes put on labour income instead. Cheap euros borrowed from the banks pumped up real estate and land prices.

Governments Bail Out the Banks • When the property bubble burst many banks were left with bad debts. • Governments bailed out the banking system. • Taxpayers were then on the hook for the debts even though they were struggling because of their own debts

The Debt Deflation Spiral • 1. Credit rating agencies downgrade countries throwing doubt over whether they will repay their debts.

The Debt Deflation Spiral • 1. Credit rating agencies downgrade countries throwing doubt over whether they will repay their debts. • 2. The financial markets demand higher interest rates for more risky lending.

The Debt Deflation Spiral • 1. Credit rating agencies downgrade countries throwing doubt over whether they will repay their debts. • 2. The financial markets demand higher interest rates for more risky lending. • 3. Higher interest rates have to be financed out of state budgets so lead to more tax raises on ordinary people (though not on elites), cuts in services and privatisations.

The Debt Deflation Spiral • 1. Credit rating agencies downgrade countries throwing doubt over whether they will repay their debts. • 2. The financial markets demand higher interest rates for more risky lending. • 3. Higher interest rates have to be financed out of state budgets so lead to more tax raises on ordinary people (though not on elites), cuts in services and privatisations. • 4. These austerity measures reduce income and spending as people and companies cut back more, reducing tax takes while elites take their money to Switzerland. .

The Debt Deflation Spiral • 1. Credit rating agencies downgrade countries throwing doubt over whether they will repay their debts. • 2. The financial markets demand higher interest rates for more risky lending. • 3. Higher interest rates have to be financed out of state budgets so lead to more tax raises on ordinary people (though not on elites), cuts in services and privatisations. • 4. These austerity measures reduce income and spending as people and companies cut back more, reducing tax takes while elites take their money to Switzerland. . • 5. Government deficits get worse.

The Debt Deflation Spiral • 1. Credit rating agencies downgrade countries throwing doubt over whether they will repay their debts. • 2. The financial markets demand higher interest rates for more risky lending. • 3. Higher interest rates have to be financed out of state budgets so lead to more tax raises on ordinary people (though not on elites), cuts in services and privatisations. • 4. These austerity measures reduce income and spending as people and companies cut back more, reducing tax takes while elites take their money to Switzerland. . • 5. Government deficits get worse. • 6. Rating agencies downgrade country debt ratings again. . .

The Debt Deflation Spiral • • 1. Credit rating agencies downgrade countries throwing doubt over whether they will repay their debts. 2. The financial markets demand higher interest rates for more risky lending. 3. Higher interest rates have to be financed out of state budgets so lead to more tax raises on ordinary people (though not on elites), cuts in services and privatisations. 4. These austerity measures reduce income and spending as people and companies cut back more, reducing tax takes while elites take their money to Switzerland. . 5. Government deficits get worse. 6. Rating agencies downgrade country debt ratings again. . . 7. Riots, strikes and protests eventually means that governments fall

The Debt Deflation Spiral • • 1. Credit rating agencies downgrade countries throwing doubt over whether they will repay their debts. 2. The financial markets demand higher interest rates for more risky lending. 3. Higher interest rates have to be financed out of state budgets so lead to more tax raises on ordinary people (though not on elites), cuts in services and privatisations. 4. These austerity measures reduce income and spending as people and companies cut back more, reducing tax takes while elites take their money to Switzerland. . 5. Government deficits get worse. 6. Rating agencies downgrade country debt ratings again. . . 7. Riots, strikes and protests eventually means that governments fall 8. European Union imposes "technocratic" - i. e. Unelected rulers - usually former bankers and their associates. .

The Debt Deflation Spiral • • • 1. Credit rating agencies downgrade countries throwing doubt over whether they will repay their debts. 2. The financial markets demand higher interest rates for more risky lending. 3. Higher interest rates have to be financed out of state budgets so lead to more tax raises on ordinary people (though not on elites), cuts in services and privatisations. 4. These austerity measures reduce income and spending as people and companies cut back more, reducing tax takes while elites take their money to Switzerland. . 5. Government deficits get worse. 6. Rating agencies downgrade country debt ratings again. . . 7. Riots, strikes and protests eventually means that governments fall 8. European Union imposes "technocratic" - i. e. Unelected rulers - usually former bankers and their associates. . 9. Bankers who have “insured debt” against default lean on politicians behind the scenes lest they have to pay out and pressure for further austerity on the people

The Debt Deflation Spiral • • • 1. Credit rating agencies downgrade countries throwing doubt over whether they will repay their debts. 2. The financial markets demand higher interest rates for more risky lending. 3. Higher interest rates have to be financed out of state budgets so lead to more tax raises on ordinary people (though not on elites), cuts in services and privatisations. 4. These austerity measures reduce income and spending as people and companies cut back more, reducing tax takes while elites take their money to Switzerland. . 5. Government deficits get worse. 6. Rating agencies downgrade country debt ratings again. . . 7. Riots, strikes and protests eventually means that governments fall 8. European Union imposes "technocratic" - i. e. Unelected rulers - usually former bankers and their associates. . 9. Bankers who have “insured debt” against default lean on politicians behind the scenes lest they have to pay out and pressure for further austerity on the people 10. People who cannot pay don't pay – so the prospect of default looms anyway.

The Debt Deflation Spiral • • • 1. Credit rating agencies downgrade countries throwing doubt over whether they will repay their debts. 2. The financial markets demand higher interest rates for more risky lending. 3. Higher interest rates have to be financed out of state budgets so lead to more tax raises on ordinary people (though not on elites), cuts in services and privatisations. 4. These austerity measures reduce income and spending as people and companies cut back more, reducing tax takes while elites take their money to Switzerland. . 5. Government deficits get worse. 6. Rating agencies downgrade country debt ratings again. . . 7. Riots, strikes and protests eventually means that governments fall 8. European Union imposes "technocratic" - i. e. Unelected rulers - usually former bankers and their associates. . 9. Bankers who have “insured debt” against default lean on politicians behind the scenes lest they have to pay out and pressure for further austerity on the people 10. People who cannot pay don't pay – so the prospect of default looms anyway. 11. Banks fear bankruptcy and a domino chain of failures as state bonds are downgraded and their assets lose value

Deflationary Spiral

Sovereign Debt Crises • A state that has debts but which issues its own money supply can always print enough money to repay its debts. (Or get its central bank to print money and then make the money available to the government) • But that cannot happen in the Eurozone and indeed the Treaty of Maastricht outlaws central banks creating euros and making them available to states. . . • So states that get in this deflationary spiral can run out of money and need to borrow – and not have the money to bail out their banks. .

The Sovereign Debt Crisis then exacerbates the banking crisis • Another vicious circle: • States bailing out banks by taking on bank bad debts themselves become financially vulnerable so that their own debts become default risks • Then banks still holding state debt (bonds) find their assets are no longer safe and means, in turn, that defaulting states would mean defaulting banks • The sovereign debt problem may also be passed through credit default swap markets back to banks (though the biggest players find ways to wriggle out of their obligations)

The supposed rescue policies

European Financial Stability Mechanism • In return for loans from the EFSF countries must adopt German dictated strict austerity measures which will reduce incomes thus making state and banking sector finances worse – an exercise in futility. . .

Techniques for rescuing the Eurozone

ECB and the Long Term Refinancing Operation (LTRO) • • What is LTRO? The long term refinancing operation (LTRO) is a cheap loan scheme for European banks that was announced by the European Central Bank (ECB) towards the end of 2011 in a bid to help ease the eurozone crisis Why are banks signing up for LTRO? Eurozone banks are strapped for cash, and with the ongoing crisis in the region, investors have become slow to back them up. As the money starts to dry up banks face a potential funding, or 'liquidity', problem. The biggest strain on eurozone banks is repaying their debts to bondholders – these redemptions are 'absolutely massive' in 2012. How does LTRO work? Banks in Europe ask the ECB for the loan. The loan is then backed up by collateral through the bank’s own national central bank, meaning each country vets the collateral for the loans given to banks. The loans differ from the ECB’s previous monthly, longer-term lending programme, which allowed banks to take money for a three-month term at low rates.

European Banking Crisis – The Spanish Government doesn’t want to use the ESFS • Spanish banks are sitting on roughly € 1 trillion ($1. 3 trillion) in shaky loans related to the ailing real estate sector -- and urgently need fresh capital as a risk buffer. The estimates for the cash shortfall range from € 50 billion to € 200 billion. • Since such sums of money would overburden both the banks and the government budget, experts believe that the Spanish government should urgently seek help from the EFSF. • But Spanish Prime Minister Mariano Rajoy is resisting this move, not just because the euro partners would basically have a say in governing the country, but also because his entire nation would then be branded as high risk -- and would probably find itself cut off from the international financial markets.

Unemployment • Euro zone unemployment has hit a record high, and job losses are likely to keep climbing as the bloc’s devastating debt crisis eats away at businesses’ ability to hire workers while indebted governments continue to cut staff. • Around 17. 4 million people were out of work in the 17 -nation euro zone in April, or 11 percent of the working population, the highest level since records began in 1995.

The Break Up Scenario. . .

Leaving the euro and devaluing might solve the trade imbalances for counries like Greece and Spain but. . . • The value of Euro denominated debt owed to external creditors would soar relative to GDP denominated in a weakening currency. . • Countries would be forced to default on their debts. . which are largely to Germany. . • Currently creditors are shifting the entire burden of adjustment onto debtors, while the "centre" avoids its own responsibility for the imbalances but this would rebound on Germany if it leads to a break up. .

“Too much success is not an advantage” Lao Tzu “Tao te Ching”

Germany’s export success becomes its Achilles Heel • • The exports to southern europe exceeded imports so Germany earned more from exports than it paid for imports. This money balance was used for loans to southern europe through the banking system so that they could buy the imports from Germany A wave of defaults in southern europe would mean Germany’s own banks would need to be bailed out At the same time export demand generates a huge proportion of German GDP – if/when this crashes so too will German export markets and thus the German economy. . . Germany’s economy is thus very vulnerable if and when the euro crashes. . .

What would a collapse feel like? No money/credit = no goods. . . E. g. Energy and pharmaceuticals in Greece • 1. “Greece's power regulator RAE told Reuters on Friday it was calling an emergency meeting next week to avert a collapse of the debt-stricken country's electricity and natural gas system. RAE took the decision after receiving a letter from Greece's natural gas company DEPA, which threatened to cut supplies to electricity producers if they failed to settle their arrears with the company. ” • 2. “The country's pharmacies are owed 500 m euros by the statebacked healthcare insurer, according to reports. From next week patients will have to stump up the cash for their medicines upfront, and then claim a reimbursement from the National Organization for Healthcare Provision (EOPYY). It doesn't take a genius to figure out that a) medicines tend to be very expensive, b) so paying for them may be very difficult for a lot of people, especially pensioners. And c) if the EOPYY is having trouble paying the pharmacists, it's unlikely to find it any easier to reimburse individuals.

Trade Insurance dries up and thus imported components cease to be available • Trade insurers have been reviewing their Greek exposure ahead of the country's June 17 general election, seen as a potential trigger for a euro exit if victory goes to parties that oppose spending cuts agreed under a European bailout deal. . . • Reduced availability of insurance cover for exports to Greece will likely make it harder for manufacturers there to source imported components and materials, said Vincent Mc. Cue, trade credit client team leader at insurance broker Marsh.

In Summary • In the context of an unstable and fragile global economy loaded down with debt and rising energy and materials costs. . • Intra European trade imbalances were deflationary in peripheral countries and after 2007 created a state and banking finance crisis made worse by property market collapses which undermined the banks • Austerity policies are combined with loans to states and banks but make the situation worse creating a vicious spiral • The aim of the banks and finance houses in all of this are to be left standing after everyone else is ruined and state and other assets have been transferred to them

United States of Europe? (or a German takeover of Europe) “The plan could see vast national debt and banking liabilities pooled – and then backed by the financial strength of Germany – in return for eurozone governments surrendering sovereignty over their budgets and fiscal policies to a central eurozone authority. A "gang of four" – the European council president, the commission chief, the president of the European Central Bank and the head of the eurogroup of 17 finance ministers – has been charged with drafting the proposals for a deeper eurozone fiscal union, to be presented to an EU summit at the end of the month. ”