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What Lies in Store for Europe

The order of events is bound to be crisis-first, solution-se
Tuesday, May 1, 2012, 8:44 AM
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Executive Summary

  • The political and economic reasons why Europe's leaders will not change their behaviour until forced to by further crisis
  • The reasons Europe's future is in the hands of Germany and the ECB
  • How risk has spread from the periphery: What's next for Spain, Italy, and France
  • The sure bet for investors to consider

Part I: The Europe Crisis from a European Perspective

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: What Lies in Store for Europe

In Part I of this article, we looked at the background to the Eurozone crisis and made the point that there are substantial extra government liabilities that were hidden by most member nations to meet the joining criteria in the target year for proof of convergence, 1997. And the only reason that capital flight from Greece, Ireland, Portugal, Spain, and Italy has not led to a banking and economic collapse already is that it has been accommodated by a build-up of imbalances between the accounts of national central banks of the individual Eurozone members.

The End of the Keynesian Experiment

In truth, all advanced Western democracies face the same crisis. It is the end of the Keynesian experiment, marked by the collapse of various credit-fueled bubbles four years ago, mostly involving property. This event threatened a global systemic banking collapse, which was only averted by sovereign nations guaranteeing the solvency of their banks by shifting the risk to government bond markets. The answer for the US, UK, and Japan has been to flood the system with dollars, pounds, and yen respectively, partly to give banks breathing space, and partly so that governments could fund their ballooning deficits.

The individual states in the Eurozone gave away that facility to the ECB, so they are only the first of the advanced nations to face collapse. This is because printing money is the principal means by which governments survive financial crises.

In that sense it is wrong to blame our financial ills on Europe; that would be like sinners casting stones. Like the rest of us, by agreeing to underwrite their banks, Eurozone governments have multiplied their potential debts three, four, or even five-fold (Ireland by eight!). Unfortunately, there is nothing, frankly, that the politicians can do to stop a Eurozone meltdown; they are in a bind of their own making, and they do not understand, nor can they explain to their increasingly angry electorates, how to get out of it.

There is a remedy, and it is deeply un-Keynesian.

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