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Euro Crisis Merely Delayed, Not Averted

Posted by Larry Doyle on May 10, 2010 8:39 AM |

They blinked.

The European Union and European Central Bank stole a play from the wizards in Washington to avert an immediate currency crisis in the EU and the potential ripple effect around the world. Did they do the right thing? For me, the question of addressing the fiscal crisis within the EU is not one of right or wrong; rather, when the crisis comes, how large will it be and how long will it last?

The trillion dollar package provided by the European Central Bank, the European Union itself, and the IMF is a combination of loan guarantees and quantitative easing. Shock and awe and punish those who would dare sell the Euro short, right? Clearly, the massive injection of capital will squeeze those who have shorted the Euro, but what about the long haul?

The EU is subverting the very tenets upon which the union was founded. Those tenets precluded this type of financial bailout. Violation of a moral hazard, perhaps? Straight from the Washington playbook. In fact, reports indicate that President Obama himself called on German Prime Minister Angela Merkel and French Prime Minister Nicolas Sarkozy to compel them to implement this plan. What about rules of law and principles of treaties upon which those investing capital make decisions? The ends obviously justify the means for these political leaders.

The markets will rally today, the shorts will scurry to cover, and the pom-poms will bounce mightily. But has anything really changed? The core of our global economy, and especially the economies of selected nations within the EU, remains gutted by excessive debts. That debt remains. Who will hold the nations within the EU accountable to address these debts?

Who is holding the political powers in Washington accountable? The markets have always been the mechanism to impose the necessary discipline. Markets can be gamed for a while, but ultimately the bills must be paid. Our political leaders have chosen to pay these bills by screwing future generations while kicking the debt can down the road.

The charades and shell games being played out in Washington and now the EU are not averting the inevitable economic pain and underperformance, but only delaying it.

Violating rules and principles of economic treaties and unions comes with a price. The EU and global economy still have to pay that price.

LD

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  • Matt

    AMEN Larry – couldn’t agree more. Absolutely unbelievable. Just when you thought you had seen it all, the bailouts keep getting more ridiculous. This market is also ridiculous. On Thursday, the market drops 600+ points in about 7 MINUTES, then immediately rebounds right back up (making it impossible for anyone to buy at the bottom of that drop), then Friday is very choppy, then the next day (today), the market OPENS up 400 points? Are you kidding me? As you said in your post on Friday – count me out.

  • Fred

    “Looking at the current state of the world economy, the underlying reality remains little changed after this weekends proposed bailout of Greece: there is still more debt outstanding than is capable of being properly serviced. We can’t continue to issue gov’t debt to bail out borrowers because this means the world economy is left with $2 of debt for every $1 that existed previously. Furthermore, bailout capital moves from the hands of savers into the hands of bondholders who made bad investments. This policy has the effect of shifting money from future new productive investment into bad investment previously made.

    We should seek failure and restructuring, let’s turn the debate from talk of bailouts to talk of restructuring. Let bondholders take a haircut for bad investments, aren’t failure and restructuring fundamental principals of a vibrant capital market based economy?”

    Dr. John Hussman

    • LD

      Fred,

      Thanks for sharing Dr. Hussman’s comments. I concur. I have little interest in burdening my children or other children with the mistakes of profligate spending and political corruption made by current and previous generations.

      This will not end well.

  • Sean

    The entire global economy has devolved into a confidence game, not much different except in size and scale to what Bernie Madoff was running. This $1-trillion fund is the equivalent of the EU going all-in in their con-game. What happens after the shock & awe of this deal wears-off, and when the bond markets call the EU’s bluff, and the EU governments are forced to start actually drawing down on the facility? What happens when the world discovers that $1-trillion is not nearly enough? What’s the over/under on how long the Euro will continue to exist?






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