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EUís Great Leap into the Non-Negotiable Unknown?
Commentary on the News
Tuesday, November 22, 2011
Ed DeShields

As research firms place disappointing odds against Europe’s financial and political future, it’s Brussels that’s now in charge.  Forget sovereignty.  There’s a new sheriff in town.

In Brussels, the stuffy headquarters of the European project for more than 50 years, a siege mentality has taken hold.  Brussels is exercising unprecedented powers of intervention over national budgets, tax policies, and labor markets in an attempt to save the Union. The scrutiny, with Germany’s strong-armed insistence, extends even to a country's schools, universities and courts.

Forget dissent.  Whether expressed through referendums, elections or national parliaments democratic opinion will have only a limited input. 

José Manuel Barroso, the Portuguese president of the European commission is charged with coming up with a plan for salvation.  He says,

"If this is a mess, I prefer this mess to totalitarian occupation by the Soviets or a Europe [during WWII] where there was no food. Some of the worst events in human history happened here on this continent. So if you compare then to now, well, we have our current difficulties but in comparison…"

Comparison to what?  Sounds to me like totalitarian occupation by Brussels is ahead – along with the modern-day fall of the western Rome for good.  The direction is non-negotiable.  For "Europe" – the idea rather than the geographical entity – it is now or never.  If Brussels fails, Europe fails. 

It’s ugly out there.  One senior EU diplomat said to the newspaper Guardian last week, "We need to get through Christmas and keep this ship afloat."

But the odds are in – and they’re not promising.   An expert at Exclusive Analysis, a research firm that focuses on global risks, says if Italy explodes then the whole world is involved.   They put the odds of all-out collapse at 65%.  For those looking for any hope that the crisis can somehow be avoided you can count on a mere 10% chance.  

When will this happen?  The banking crisis could go critical in Europe between November 23-26 followed by an all-out Greek default and a run on the Italian banking system.

Let’s take a quick spin around the continent for any sign of hope.  

Eastern Europe currencies are selling-off, led by Hungary’s fragile forint, which lost nearly 1 percent against the euro to trade at its lowest since March 2009.  Investors are fleeing Europe forcing the currency markets to plunge; Brazil’s real -12.2 percent, the Hungary’s forint by -14.4 percent and South Africa’s rand -15.5 percent.

Central banks have their hands full aggressively trying to control the shock by buying up their own currencies.  Growth in emerging market foreign reserves fell to zero. Portfolio capital flows into emerging markets from Europe, which have totaled over $500 billion since early 2009, went into sharp reverse in August.

China too won’t escape the chill.  China’s latest trade numbers showed the euro zone crisis is already hurting its economy. Exports fell by 1.2% from a month earlier. Korean data was worse with a sharp reduction in October. Growth in Taiwan, the third biggest exporter in emerging north Asia, was little changed — but the trend of its trade slow down is unmistakable — falling demand in the European Union.

The experts are making some bold calls with clear timelines on when the euro zone will be thrown into a major financial crisis.  Here’s their 65% scenario:

The most likely outcome (thought to be a 65% chance of occurring) is a sudden crisis in which the US, UK and BRICs nations refuse to provide funding via the IMF for the euro zone. 

The governments of Greece and Portugal collapse with no consensus on how to handle the debt crisis.  Social unrest follows.  German opposes handing over more funds. 

China and the other BRICs give clear signals that they will not support the bailout fund.

The ECB refuses to print money needed to bailout the PIIGS. European banks refuse to accept the 50 percent haircut on the Greek debt.  Both the IMF and the ECB then suspend payments to Greece.

French debt is downgraded leading to a freeze on interbank lending. 

Greece and Italy, each with new governments are “faced down by protestors in their attempts to implement more austerity”.

Civil unrest follows in Spain following the election of a new government which pushes through even tighter austerity measures, and Portugal announces it cannot meet financial targets putting its bailout cash from the IMF and ECB at risk.

Default creates bank runs in Greece and Portugal and a downgrade of French sovereign debt from AAA to AA”.

The spreads applied to the debt of all PIIGS increase with yields on Italian bonds reach 7.3 percent. In a second contagion effect, depositors in Spain and Italy fear a banking crisis in their own countries, which end up creating a series of bank runs and a collapse of the interbank credit market as banks know that most of their counterparts are at risk.

Greece finally and completely defaults.

The collapse comes to a head between November 23-26 when Greece leaves the euro to print money to rescue its banking sector. But, its new currency fails quickly and depositors lose out as their investments are converted into the new local currency.

Governments, at large, default and the banks default on their foreign debt, which causes a banking crisis across Europe. Governments freeze deposits.

If this isn’t news enough keep your eye on Brussels.  Jean-Claude Juncker, the prime minister of Luxembourg and current president of the Euro-Group, was reported to have said: "We all know what to do, but we don't know how to get re-elected once we have done it."

The quip has gained a frightening new relevance ahead of a "great leap forward" to an economic union struggling to keep the markets at bay as it abandons its sense of democracy.

Brussels, led by Germany, have made it clear that the sovereign debt crisis leaves politicians no room to maneuver, however far their fortunes fall.

About Ed DeShields

Last article: Is a Financial Jubilee Ahead?



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