The soothing balm was still pouring forth from Dublin yesterday. ‘Ireland will recover quickly’ wrote Danny McCoy in the FT at the weekend; an interesting surname with which to be making such hopeful forecasts, and Danny- boy is indeed the DG of Ireland’s CBI equivalent. Had Danni Minogue written the piece, its delusion and amateurish analysis would be understandable: as it was, desperation prevailed and no doubt the unreal McCoy was pressured into writing something supportive.
My own view is that most commentators have missed the real game going on behind the scenes of the Irish crisis. The crisis is real enough, but the unwillingness of either Brussels or Bankfurt to tackle it is the giveaway to what the Slog suspects is really going on here.
It’s worth noting for starters what the fairly obvious agenda is behind Basle III – viz, the survival of sovereign Executives at worst, and certainty that their cost of borrowing stays low. (It’s also another reason for ZIRP, as we’ve noted before: all Governments overspend – even German governments: it goes with the territory. Ergo, “let’s keep the cost of profligacy down, guys”.)
The banks, by contrast, don’t like BIII because it’s based on ‘once bitten twice shy’ from those who bailed out the mad folks. But even now, after it has finally gotten through relatively unscathed by banker whingeing, it is still woefully weak in key areas. It wouldn’t have helped Lehman (where
JP Morgan hanging onto weekend money liquidity was the key issue) and it wouldn’t have stopped the Irish disaster either: only the most pedantic, infant playground system involving a teacher standing next to every kid could stop idiots lending six times the gdp, and other eejits taking it. It’s the species, stupid.
Also – it needs saying, as many are getting forgetful about this – Basle III would’ve been about as welcome as a rusty blade at a circumcision in the ‘free money, as much as you want’ culture created and nurtured by both Brussels and its central bank for eurozone members.
This last observation is central to my thesis: The ECB’s boss Jean-Claude Trichet has now decided that the days of largesse are behind us. You can either take the view that Trichet is thick (and I know at least one senior German industrialist who thinks that – along with two ECB Board members) or you can get real, and grasp that not even the EU would promote a complete pillock to run the European Central Bank.
What Tricky Trichet has somewhere about his person is a list of tactics and strategies to try on the markets. We’ve been through creating the AAA ESFS, emergency loans to Athens, buying ClubMed junk bonds to maintain a ‘healthy’ market, buying local bank debt to make their balance sheets look better, fiddling a stress test to reassure about those balance sheets, doing a deal with Norway to buy big into Greek debt, claiming that nobody else in the eurozone needs help……and now, buying euros like there was no tomorrow – because there may well not be. (How else to explain this basket-case, mickey-mouse currency the euro strengthening to 1.46 against Sterling on Friday?)
In short, the markets sussed long ago that Trichet is devious at best, and – all scams considered – something of a con artist. But the question remains: what’s his agenda?
I think the answer’s simple: the survival of the euro, the survival of the eurozone’s core members, and the continued existence of the EU…..whatever the cost to ordinary people. This isn’t conspiracy theory – it’s borne out by his actions, and makes sense in term of motive.
In the FT’ yesterday, the Oped noted that ‘Greece survived only because fellow Europeans unclenched their treasuries’ fists. Ireland and Portugal are again besieged by markets, with sovereign yields reaching record-high spreads…’
So why does Trichet insist that these victims can suddenly fly without assistance, whereas Greece couldn’t? The answer is simple: the ECB’s portfolio now is a crock of junk bonds, crappy currency, less gold and bad debt. Trichet knows he cannot afford to bail out Ireland – because in doing that, he will have to bail out Portugal, and eventually Spain – probably followed by Italy. And there isn’t the money to do that without the markets losing confidence in the whole shebang…..ECB, eurozone, euro, and EU.
For example, if you were genuinely keen to help the Irish and Greeks, why knacker their export programmes by buying the currency to increase its value? If Olli Rehn’s only concern is the safety of a fellow member-State, why has he bullied the Irish Cabinet into holding off from ESFS help and ordering them to put up taxes?
And as a banker yourself, why do you Trichet push very hard for a tougher Basle III to force the Franco-German banks to bolster their capital? Because you know full well how exposed to bad ClubMed debt they are….and you certainly don’t want a chain reaction being started by huge bank failures.
Hear not their assurances, but rather watch ye what they do. The straightforward truth here is that the so-called ‘peripheral’ EU members are expendable: come what may, the eurozone must survive. Not just for hubris sake – although that’s a big part of it – but because without the cheap exports provided by the euro, Germany would be in the mire very quickly. And with Germany in the mire, France would be in very deep doo-doo indeed.
Jean-Claude Trichet is, after all, a Frenchman. He knows how much gold France has – lots – and how solid its international stability reputation remains. But he also knows that 55% of French employees work in or on the fringes of the public sector. He knows that without the Common Agricultural Policy, French farming would implode, and every autoroute blocked in perpetuity. He knows that France’s trade gap has been widening for years, and that not for even one single fiscal has the country kept within eurozone deficit guidelines. He knows that its deficit is the fastest-growing in the EU – 13 billion euro a month and rising. And above all, he knows that genuine reform of the economy to achieve growth is impossible: just at the thought of a two year rise in the State retirement date, the CGT has already called three General Strikes. If France – God forbid – ever started firing public sector workers, anarchy would arrive very quickly.
The bigger game is the survival of the inner core. Jean-Claude Trichet’s objective is to keep everyone he can in the eurozone (no matter how poverty-stricken that makes them) and keep the original Franco-German spine in place. The dream of a European democratic grouping was something harboured forty to fifty years ago by genuine idealists like Konrad Adenauer and Ted Heath. But it was dead the minute everyone became starry-eyed about a thing called the EU – an EU with one undisciplined currency, and 27 completely disparate economies.
The dream died as controlling bureaucrats were given too much power to realise their objective: a mediocre, rigid conformity of naive citizens paying for them to have big offices, huge salaries, fat lunches and luxurious pensions. No thought of an innovative nature has ever entered the minds of these people: they believe in Big Clout to create uneven playing fields to their advantage. That’s why the likes of Nick Clegg and Peter Mandelson spent years doing seedy EU trade deals with Russians and Africans. Rather than encourage a genuinely entrepreneurial culture, people like this bury it in red tape – not for nothing do the Libertarians refer to it as the EUSSR.
For all these reasons – lack of transparency, fiscal madness, Franco-German selfishness, bureaucratic strangulation, lack of export drive, and an unreformable economic workforce structure – this unwieldy juggernaut will eventually run out of road. The Establishment in the UK has no intention of getting out, and smears any sensible person who suggests that secession is precisely what we need. Therefore, the UK will very probably be severely injured in the ensuing Crash. But the citizens of the eurozone periphery will be asked to sacrifice everything in Trichet’s cause. I don’t envy them their fate.