There can surely be no-one who has not grasped that mid-April 2012 has brought with it not just another bout of euro-jitters, but a serious wobble in one of the eurozone's biggest economies, that of Spain. At the time of writing the rate on Spanish 10 year bonds was creeping up to unsustainable levels and the markets had begun to show considerable unease about the amount of Spanish government debt on the books of Spanish banks.
ECB President Mario Draghi's Long Term Refinancing Operation (LTRO) which has seen the ECB provide billions to Europe's banks, clearly runs into difficulties if the markets decide that Spanish banks borrowing from the ECB to buy dodgy Spanish sovereign debt is not a good thing. The last week or two has shown quite clearly that this is pretty much the view that the markets have now come to. It looks as if the fact that the ECB has managed to create an artificial appetite for the bonds of peripheral countries, has been well and truly rumbled, and the markets are now thoroughly unimpressed. LTRO was a sophisticated trick (see my earlier blog [LINK]) and it probably has some way still to run, but as far as Spain and Spanish banks are concerned, LTRO now seems to be at the very least ineffective, and at worse, merely another way of stoking up the fires and shoving Spanish banks that much closer to themselves requiring a truly massive bailout which the Spanish government certainly would not be able to meet.
Speaking at a recent Institute for New Economic Thinking (INET) conference on the Future of Europe, George Soros warned in very plain language that Europe is currently on the high road to disaster and needs to change course fast if it wants to avoid the coming catastrophe. "History is not predetermined," Soros told his audience. There is still time to do something about it but it is going to require a complete change of direction from the German public and German politicians.
"The problem for Spain, Ireland, Portugal and Greece is that they are like third world countries that are heavily indebted in a foreign currency," Soros says. The problem for the EU as a whole is that Europe is in simultaneously in the throes of a banking crisis, a sovereign debt crisis, a euro crisis, a balance of payments crisis and a competitiveness crisis. Preventing the collapse of the EU is now the single most urgent problem facing us - right up there with climate change, but with a great deal more urgency, since the tipping point for the collapse has moved a lot closer, Soros says. His solution, though couched in technical terms as the need to monetise seigniorage is for the EU to turn itself into a transfer union where wealth flows from the richer to the poorer nations without creating debt.
The various EU states gave up seigniorage to the ECB so they can no longer generate state revenues through the minting of coins or the creation of their own currency. It therefore makes sense, Soros suggests, to compensate these states, through the ECB, by giving them a chunk of cash each year, with more cash going to those who need it most. This is, of course, nothing more or less than Soros advocating the transformation of the EU into a transfer union. Over a 20 year period a modest seigniorage would wipe off the debts of an Italy or a Spain and would allow them to return to the Maastricht criteria for fiscal stability.
Germany basically has two choices, Soros suggests. It needs to decide if it is committed to the euro, and if it is, then the only way forward is to create a transfer union. If it isn't it needs to get back to the Deutschmark fast, and that too, would free the peripheral states to get out from under the impossible burden of being massively indebted in a currency over which they have no control.
Never one to shy away from telling governments unpalatable truths, at the time of writing Soros was planning to go to Berlin to tell the Germans why they needed to stop saying "Nein" to a transfer union and why they need to start thinking rather more clearly, before a catastrophe engulfs the eurozone. The odds are stacked against him, but funny things happen when the marbles really start to roll around...
Further reading on the European Sovereign Debt Crisis:
- Investing in Corporate Debt in Difficult Market Conditions, by Robert Marquardt
- Warwick Commission Highlights the Local and Political Dimensions of Global Financial Reform, by Leonard Seabrooke
- The Challenges to Slow Growth in the Advanced Economies Just Keep Coming, by Stuart Thomson
Tags: Deutsche Mark , ECB , euro , euro jitters , Europe , European Monetary Union , eurozone , George Soros , INET , LTRO , Mario Draghi , Spain , Spanish banks , Spanish bond yieds , Spanish debt , spanish recession , spanish stock exchange