Tag Archives: Greece

The Doomed Euro?

In any normal January commentators offer their views on the coming year. However, most years, after the usual mix of doom and gloom, the world seems to carry on in the same old way.

This year, however, really is different. Quite a lot of the world is already not carrying on in ‘the same old way.’ In 2019 we are going to realise that something big has changed ‘out there’.

The Eurasia Group, political risk consultancy and adviser to the world’s elites, warns in its latest report: ‘The geopolitical environment is the most dangerous it’s been in decades.’ This is the year that events, and lack of remedial action, threaten global stability and risk collapsing the old world order in a way not seen for many years. The post-1945 Pax Americana is crumbling before our eyes as President Trump unravels the transatlantic alliance that has underpinned Europe since the 1950s. Many blocs – NATO, the UN, the G7, G20, WTO and the EU – are in varying degrees of crisis as new global challenges emerge and as America walks away from acting as the world’s sheriff. The Middle East is a basket-case, fighting its own ‘Thirty Years War’ between Sunni and Shi’a with a wary Israel looking on. In the East, China and North Korea are flexing their muscles; and in the emerging world a new breed of hard-line autocrats are taking over in Brazil, Turkey, Saudi Arabia, the Philippines and Hungary.

The world order is changing – and not for the better.

The outlook is bad enough; but to make things worse, a world trade recession is looming. Global economic forecasts for 2019-20 make for dismal reading: 2019 could turn out to be the year that the world economy falls apart, although timing global economic slumps is like watching an oil tanker running slowly onto the rocks.

This is the wretched backdrop against which the European Union is confronting the biggest challenge to its existence since it began as a dream of a single European superstate back in the 1950s.

The year 2019 will be full of important decisions for the EU, as Brussels will have to set a seven-year budget – without Britain’s cash – as well as appointing new leaders to key institutions, and discussing reform, whilst coping with falling economic growth, the threat of populist national elections, trade frictions with the US, plus the challenges from Russia and China. Brexit is merely background noise to the increasingly embattled, unelected and unpopular bureaucrats sitting in the Berlaymont (European Commission HQ).

The EU is fighting on three fronts at the same time, even as many of its member states have their own domestic problems to contain (the French anti-Macron revolution is a symptom of a wider EU malaise):

  • First, nationalism (aka, ‘populism’)
  • Second, the Catalan rebellion and the Visegrad Four’s mutiny epitomise the growing challenge to Brussels’ rule
  • Third, underpinning everything, is the threat to the Euro. Brussels’ flagship currency is in deep trouble

The smiling celebration party for the euro’s 20th anniversary masked the rising panic among the fat cats, bureaucrats and bankers waving champagne flutes for the cameras. They now know that their grandiose plans to cement the EU together by issuing a single currency was a huge gamble and a serious mistake. ‘The house of cards will collapse’, admits Professor Otmar Issing, ironically one of the original cheerleaders of the euro and the founding chief economist of the European Central Bank (Business Insider, 17 October 2016).

For a real monetary union to work smoothly you need a genuine single authority, plus the ability to swing government money around a united economy. Thus England can pipe London taxpayers’ cash to support Scotland, Wales and Ireland; and the US can shore up the Rust Belt states with money from New York and California. Brussels however does not have the power, or the authority, to transfer rich German taxpayers’ cash to struggling Greece, or to get the Netherlands to pay for the million illegal immigrants who are descending on Italy.

The real economic problem is the EU’s ‘Club Med’. Southern Europe’s economic fragility was well known when Greece was allowed to join the euro, after some pretty dodgy accounting. It was always a risky venture.

To take one simple example, when Greece had its own currency, Athens could stimulate an economic slump by devaluing the drachma: suddenly Greek holidays were dirt cheap and millions of tourists brought their spending power to Greece. Not anymore. Athens was trapped into a currency it could not control or devalue, and which the big boys of the EU wanted to keep strong at all costs.

Devaluation of any German controlled pan-European currency was unthinkable. So Greece was told to cut its budget and live with austerity. That meant that the only way Greece could get extra euros was by borrowing – heavily. Sure enough the big German and French banks were only too happy to lend trillions of euros to the Club Med countries. Unfortunately it became a vicious circle, known as a ‘debt doom loop’, between countries with high levels of debt and the banks that hold that debt.

The problem got worse. Big banks have bought more and more public debt from Eurozone countries. However, should the debts not be paid back (‘non-performing loans’ in Bankspeak) then the banks holding those loans are themselves in deep trouble. Now the euro-banks are running scared. Without payment, they could follow Lehmann Brothers into oblivion. The ‘rescue’ of Greece 2010-13 turns out to have been nothing more than a face saving bail-out ‘loan’ to save the big French and German banks. Even the IMF has admitted that Greece was sacrificed to save the euro and the European banking system from disaster in the great financial crisis.

Italy is the canary in today’s Eurozone coal mine. Italian banks hold one-third of the unpaid euro loans; Italy largest banks hold 300 billion euros of bad debt, dodgy securities and off-balance sheet items that aren’t being repaid. Also, billions of euros of Italian government bonds are held by Deutschebank, Commerzbank, Societé Générale, Crédit Agricole and the Netherlands’ ING.

All this could be solved at the EU level; however there is fierce opposition from Northern European countries to swinging their taxpayers’ money around. In 2018 they diluted President Macron’s proposals for greater money pooling and higher spending in the Eurozone. The idea of stripping elected parliaments’ control over taxation, spending, and the economic policies of the nation state was never going to be accepted; ‘ever closer union’ had hit the buffers of national self-interest, as the UK’s Brexit proves.

Without a means to transfer funds and a ‘fiscal union’ by the EU countries (by pooling everyone’s taxes in Frankfurt and Brussels) the euro is at mortal risk. Now the economic storm clouds are gathering to make things even worse. Eurozone economies are slowing. Even the German economy is contracting. Industrial production was down by 4.7 per cent in the previous year leading up to November 2018. This means that, unbelievably, Germany – yes, Germany – is probably heading for a recession. Meanwhile, Italy has been in recession for a long time and Greece, Ireland, Spain and Portugal are still struggling to escape the last financial disaster. The Eurozone is heading for a full-blown recession; and without the means to devalue, or order ‘government’ spending to boost European economies, a slump seems inevitable. The pressure to break out of the stranglehold of the euro in order to print their own money has never been stronger for some nations.

‘What is clear is that the status quo cannot persist indefinitely if the euro is to survive in the long term’, an LSE blog article warned in October 2016.

This combination of member states’ disillusionment with Brussels, domestic problems, a shrinking economy, massive indebtedness, social and political challenges and the crisis of migration, plus the intrinsically unstable basis of the euro, means that monetary union has failed economically and politically.

Unless the EU27 agree to form a new central Treasury, the euro is doomed. That’s something to keep an eye on in 2019.

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Money Makes the World Go Round

For the second time in a month, to my surprise, I find myself agreeing with President Putin.  Speaking at the International Economic Forum recently he warned: ‘We don’t need trade wars today … we need a comprehensive trade peace.’

Cuddly old Vlad was really warning us that there’s a financial firestorm brewing. Looking at what is going on with the euro and the Turkish lira, it’s hard to disagree.

The euro is really our old friend the Deutsche mark, cunningly devalued and disguised to pay for German re-unification, and now Europe’s chokehold currency of no choice. For example, any independent Scotland joining the EU would nowadays be ‘forced’ to accept the euro. Difficult for the Scots: not for nothing did Thomas Carlyle call economics the dismal science.’

Dismal science or not, money makes the world go round – and always has done. Even St Paul admitted: ‘The love of money is the root of all evil.’ This titanic battle for economic power rages around us every day, as China and America tussle behind the scenes over who owes how many dollars to whom and what they are worth, whilst a worried Commission in Brussels watches nervously as its great dream of a superstate called ‘Europe’ begins to disintegrate.

Because the UK’s ‘Brexit’ is the least of the EU’s problems. With Poland refusing to toe the Merkel party line, the Balkan states disobeying Juncker’s ‘diktats’ on immigration, and now a major trade war looming with the USA, Brussels has its hands full. Money is at the heart of it all. The unfolding Italian political train crash that is the new populist, anti-establishment Eurosceptic government is Brussels’ worst nightmare. It threatens their euro. Austrian chancellor Kurz gives the game away, bleating: ‘We saw in Greece how dangerous it is if a country has a bigger and bigger debt and I hope that we will not have a second Greece in our neighbouring country, Italy.’

The reason? Money and debt. Frightened hard currency has been haemorrhaging out of cash-strapped Italy for months, driving it even further into the red, amid fears of a Greek-style euro debt crisis which would bring the country to its knees. The new Italian government is even threatening to quit the euro and set up a parallel currency.

This is serious, because Italy is the eurozone’s third largest economy, nearly ten times the size of Greece’s.

The former chief economist of the IMF – Olivier Blanchard – believes the eurozone is heading for an ‘horrific crisis,’ denouncing Italy’s popular new government’s plans as ‘likely to violate all EU and domestic fiscal rules and put debt on an unsustainable trajectory’. What he means is that Rome is inviting an economic and political war, because the big French and German banks risk losing billions if Italy says, ‘no more pay offs.’

Brussels now has the beginnings of a serious rebellion on its hands. However, once again Italian voters have been over–ruled by EU technocrats, pressuring President Mattarella to ignore the voters, just as the Berlusconi government was toppled in 2011 by Brussels and the European Central Bank, in what was effectively a ‘soft coup.’

This is dangerous territory.

The Italian president’s refusal to accept the Lega-Gillini finance minister because he ‘could provoke Italy’s exit from the euro’ is dynamite. The political message to Italian voters is clear: whoever you vote for, the eurozone rules. A Lega spokesman explained: ‘You have to swear allegiance to the god of the euro in order to be allowed to have a political life in Italy. It’s worse than a religion.’

In Brussels,  Juncker openly threatens: ‘There can be no democratic choice against the European treaties. One cannot exit the euro without leaving the EU,’ and Günther Oettinger, European Budget Commissioner for Budget, actually said: ‘This will teach the Italians to vote for the right thing.’

Because the ECB and Brussels will fight to the last drop of Italian money to stop anyone escaping from their eurozone straitjacket.  The French Finance Minister warns: ‘If the new government takes the risk of not respecting its commitments [in other words, “If Italy doesn’t pay its huge debts to our big French and German banks”], the financial stability of the eurozone will be threatened. Everyone must understand that Italy’s future is in Europe and nowhere else. … there are rules that must be respected.’

This push to smother Italy’s eurosceptic rebellion, as they muzzled Syriza in Greece, comes from a worried Berlin, Brussels, and the EU power structure. But this time they may have blundered into a trap, because the EU’s economic problems grow worse every day. Now debt-ridden Spain admits it is in serious trouble. And Spain owes euro banks ‘zillions’, too. The bottom line for the EU is that if the Italians and Spanish welch on their euro debts, then the euro is finished – with huge international bankruptcies on the cards.

‘So what?’ says the man in the Kyrenia café, ‘How do big economic problems affect me, my family and my bank account? Who cares?’

The answer to the puzzled denizens of Turkish North Cyprus is ‘look at your money.’ Something very odd has happened to their Turkish lira. One year ago, 1 GBP pound sterling bought you 4.30 TRY; ten years ago, on 31 May 2008, a quid bought just 2.12 lira. And today? Going to press, a pound buys you around 6 lira. That’s what international currency fluctuations do to the expat, watching his pension. That’s how small Turkish Cypriot businesses, being paid in lira whilst paying for their rents in sterling, go bust. The reason? Money: because the Turkish lira is now in deep international doo-doo.

For years, Ankara’s AKP government has funded its massive vote-buying economic programme with money borrowed from overseas investors, attracted by Turkey’s generous interest rates. No less than 70% of Turkey’s deficit is covered by short-term foreign loans.

The problem is paying off those loans. Interest payments were biting deeper and deeper into Ankara’s Central Bank’s precious reserves of hard currency US dollars or euros. Loans began to dry up, so the Central Bank increased interest rates to tempt the punters and keep the all-important foreign dosh flowing. The problem is that at 13.5% the interest payments were expensive – but, at 16.5%, they could become ruinous.

At which point Turkey’s would-be President stepped in, boasting that he personally intends to run the economy when he wins the election on 24 June to become all-powerful leader. On his orders, interest rates will be slashed to 10% to save Turkey’s money. Result? Instant panic and predictable flight by spooked, nervous lira investors. Consequence? A market panic with foreigners desperate to unload their lira while they can. ‘Cheap? Your real, genuine Turkish lira. A real bargain, guv … Gotta sell.’

Because that’s what markets do. That’s how economics works: supply and demand. No demand for lira, they go dirt cheap. The result is that Turkey will either have to devalue, introduce capital controls or accept that, whatever their ‘Dear Leader’ thinks, foreigners will decide just what the Turkish lira is truly worth: and foreign investors are not impressed.

As an anonymous fund manager at a major asset management firm, complained: ‘Erdogan is fighting the extremists, he is fighting after the failed coup – now he is fighting the financial markets, and that is dangerous …. You can fight your domestic foes all you want; but when you are trying to take on the global financial market, that is a battle you can’t really win.’

And the EU? Watch this space. Of one thing we can be sure: the Commission, Berlin, Paris and Frankfurt will gang up in a darkened alley, ready to bludgeon, beat, bribe, browbeat and bully Italy to keep their precious euro together at all costs. Once again, the financial gloves are off. It’s going to get ugly. Just ask the Greeks.

Money really does make the world go round.

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Watch Out! There’s a War About

For once I find myself in total agreement with Vladimir Putin, who observed recently in a Blinding Glimpse of the Obvious that ‘the world is becoming a more chaotic place.’ Whilst Pres-for-life Vlad’s BGO doesn’t exactly qualify him as a great thinker, this time he is absolutely right. There’s a definite feeling abroad of an unravelling in world affairs; an uneasy sense that something nasty is lurking round the corner of history ….

As Nigel Molesworth put it so succinctly in Down with Skool: ‘History started badly and hav been getting steadily worse.’ Looking at our increasingly troubled world, maybe ‘the gorilla of 3B’ got it right.

But first, the good news. A few months ago we were all nervously observing a ‘mad, bad and dangerous to know’ US President threatening fire and fury at North Korea’s ‘Little Rocket Man’ over nuclear missiles. It was definitely steel helmet (and don’t forget your respirator) time. Now, thanks to Trump’s interesting blend of diplomacy, brutal economic sanctions and the threat of violence, Kim Wrong ’Un seems to have a sudden change of heart and is smiling for the cameras and shaking hands across the border. Sigh of relief all round?

However, let’s not get too excited. North Koreans have a consistent track record in talks with the South and the US: consistently lying and trousering the ‘Danegeld’ paid to them to behave themselves, whilst they ignore any agreements. We need to watch this ‘deal’ very carefully.

And let us not forget that Dictator Kim was threatening nuclear war whilst still presiding over appalling human-rights abuses as he ruthlessly executed friends and family alike to eliminate his rivals. Nonetheless, if President Trump really succeeds in negotiating an end to Kim’s nuclear provocations and the Korean War (‘Neutral ground or dramatic backdrop?‘, Telegraph, 23 April 2018), he will have defused a potentially apocalyptic global crisis.

Good luck with that.

Now for the bad news; and there is far too much, as Putin warns.  Intelligence analysts are warning that trouble is looming from at least three other directions: Syria and Iran; Israel; and a global economy deep in debt.

First, Syria, where the endless civil war to keep Assad and his Shi’a allies in power has morphed into something new – and much more worrying. UN Secretary General Guterres warns: ‘The Cold War is back with a vengeance – and a difference.’ The difference is that it is no longer cold. Something very dangerous is unfolding in the war-torn Middle East. A little-known Iranian-backed Shi’a group calling itself the ‘Baqir Brigade’ has declared jihad on US forces in Syria,  where Russian and American troops are only a rifle range apart.  The US, UK and France have already attacked Syrian military targets as a reprisal for the latest gas attack. The dangers are obvious. Any Russia and US fighting in Syria could detonate a hot war and set the entire Middle East on fire.

Further north, Turkey has invaded Syria to crush the Kurds – the warriors who really defeated ISIS on the ground. Meanwhile the Iranians and their Lebanese Shi’a proxy, Hezbollah, have set up a new battle front on Israel’s border. Iran effectively runs Syria now and is turning its malevolent eye against Israel.

This time the Mullahs are really playing with fire. Israel is not a normal country. Tel Aviv will fight like a cornered cat against an enemy that has sworn to ‘sweep the Jews into the sea.’ And Israel possesses nuclear weapons precisely to deter anyone stupid enough to threaten Israel’s very existence. Israel has warned that ‘it will retaliate with every means possible,’ if attacked by Iran and its friends.

Ironically, Iran’s nuclear ambitions may be unravelling at the very moment it tries to intimidate Israel. Tehran thought that it had pulled a stroke with nice Mr Obama with his 2016 no-nukes deal to get sanctions lifted, whilst continuing to build its Shi’a empire in Iraq, Lebanon, Syria, and now Yemen. Trump is having none of that. Despite Macron’s pleading for a cosy continuation of flogging French and EU goodies to oil-rich Iran, Trump pulled the plug on 12 May 2018 and re-imposed economic sanctions, blocking Iranian oil sales and wrecking Tehran’s not-so-secret nuclear plans.

This is bad news for the world economy, which is now just as vulnerable to a financial crisis as it was in 2008. Oil is the motor of commerce. Oil prices, which dropped to $30 a barrel in 2009 and 2016, are now rising as production cuts by OPEC and Russia have finally sold the world glut of oil; so supply dries up. Iranian sanctions alone will remove 500,000 barrels a day from the market.

Even America’s new oil-shale output cannot fill this gap between supply and demand. Now Brent crude has risen to $72 a barrel and will probably go higher now that Trump has re-imposed sanctions. This could be a global economic bombshell as various geostrategic crises explode. Saudi Arabia is already talking about $100 crude, setting off a speculators’ scramble;  ‘We are pretty confident that oil will be in triple digits by next year,’ opines Jean-Louis Le Mee from Westbeck Capital.

IMF reports warn of a chain-reaction for world finance. One is well-understood: debt. Global debt has been alarmingly high since the 2008 financial crisis. Since then, nations have continued to borrow hand over fist, pushing worldwide debt to $200 trillion (a trillion is a million, million million.)  That is nearly three times the size of the entire global economy.

The second economic problem is that the Chinese and German economies are going into reverse. Germany’s economy in particular is stalling surprisingly quickly. The economic miracle by the EU’s motor of industry is over and now even Berlin faces economic problems, warns Düsseldorf’s Macroeconomic Policy Institute: ‘The danger of recession has increased markedly. It is a more critical picture than just a month ago.’

All this is happening as Korea teeters on a knife edge, Washington and Moscow go head to head, Syria faces multiple wars, Israel and Iran are shaping up for a catastrophic showdown, and the proxy war between Saudi Arabia and Iran over Yemen gets out of control with missile attacks on Saudi targets by Iranian-backed Houthis. A full blown religious war between Sunni and Shi’a has started. One intelligence analyst warns: ‘All it will take is one Houthi missile sinking a 200,000-ton oil tanker in the Gulf and the consequences would be global.’

Even here, on our island in the sun, alarming events are going on all around us. Suddenly bankrupt Greece is preparing to lease two French multi-purpose frigates to bolster its defences in the Aegean Sea, amid rising tensions with Turkey. Fighters are again on the alert over contested islands. Turkey sails warships to Cyprus to protect hydrocarbon finds. Hostages are being held on both sides. President Erdogan suddenly announces a snap election to choose the country’s next president and parliament on 24  June 2018, to give himself greater executive powers.

All this at a time when the Turkish economy is overheating, raising the possibility of another financial crisis like 2001, when the AKP first came to power promising a strong economy. With Turkish national borrowing skyrocketing and Ankara having to lure foreign money with promises of 13% interest on government bonds, this doesn’t look much like economic competence. The truth is that we are ‘living through interesting times,’ as the old Chinese curse puts it.

Whilst most normal people are just trying to get on with their lives, get to work, earn enough to raise a family and enjoy themselves, all around us alarming events look like coming to the boil. Politically we are living through world-changing history.

It’s an increasingly unstable and dangerous world.  We need to watch out for what is really going on out there.

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