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Wednesday, 1 August 2012

Increasing panic in the EU – Saving the Euro at all costs?

There is a very simple psychological effect when you are in serious trouble. If the situation becomes bleak and you don’t find a way out, you might start to panic at a certain point. And as soon as someone starts panicking, you cannot expect reasonable and rational solutions or outcomes, you start to do very stupid things. And then, everything gets from bad to worse.

This effect is currently occurring in the Euro-Zone. With a total amount of around 700 billion Euros, the European Stability Mechanism (ESM) is already bursting all imaginable amounts of funds, and still it doesn’t seem enough. With Greece facing its fiscal and economic death, the voices for an unlimited ESM fund are echoing louder and louder. The European Central Bank (ECB) already lowered the interest rates to such a low level, that it seriously affects national pension funds and life insurance payments in a way that their return on investment value will be nearly nullified.

According to plans of supporters of the ESM – such as France and Italy – the ESM shall buy big amounts of crisis states’ bonds from states like Italy and Spain. Then, the ESM deposits these bonds as collateral security at the ECB and receives fresh assets in order to stabilize the crisis states. In short, this strategy would open an unlimited access to low interest rate bonds and a permanent funding of the crisis states.

Endless money supply? It looks like a bottomless pit, and it actually is one. Although the release of additional assets might be a temporary solution for short-term budget reconciliation, in the long-term such an infinite loan will increases the overall budget deficit. The outcome is pretty obvious, the crisis states’ collapse will only be postponed, but not avoided; and the awakening will be even harsher, the collapse will be far more severe, with even more horrific consequences for the country’s population and the entire economic performance of the Euro-Zone, with the European Monetary Union (EMU) to fall apart rapidly.

In order to save the Euro as the common European currency, the top policy makers are considering any wicked possibility to protect the Euro-Zone from any possible break-up, or at least to postpone the break-up of single Euro-Zone countries such as Greece. According to recent reports, the amount of available cash money reserves in Greece nearly equals zero. Being terrified to death by the unpredictable short-term and long-term consequences of a single break-up or a Greek bankruptcy, and the Pandora’s Box to be opened and to unleash all evil falling down on Europe, none of the political decision makers seem to see the obvious impossibility to maintain the current economic and monetary system in Europe. The imminent Greek collapse and the deteriorating Spanish situation are a dead giveaway of the EMU’s failure, and the failure of the national central bank system to be replaced by a centralized monetary system.

The most imminent danger of such an endless ESM fund is inflation. Unlimited money supply and low interest rates massively increase the inflation threat, and this will heavily affect the real economy and the citizens’ own financial assets. The ECB attempts to reduce the inflation hazard by a massive increase of its own reserves. Also, the inflation risk keeps rising if the banks grant big quantities of loans – something that will not occur in a full range recession. Still, the fear for massive cost rise is latent, especially in Germany which has witnessed the effects of hyperinflation in the 1920s and still is terrified of any potential inflation menace.

Again, it is the German government heavily opposing the idea of the unlimited funds accesses. For obvious reasons, because the ESM could even withdraw financial assets from Germany to support the crisis countries and Germany would not even be able to veto this decision. But it is not the matter of fact that Germany will once again be the main financial contributor to the ESM (with probably up to additional 80 billion Euros), it is mainly a matter of rationality against massively increasing panic reactions.

Some may argue that it would be more beneficial to remove some pressure form the crisis countries in order to give them a chance for a slight recovery or a short break to reconsider the austerity programmes. However, under very special circumstances it is more effective to set them actually under pressure. This rule especially applies to European history, and Europe has once again reached this point.

On the last EU Summit in Brussels in June 2012, ECB President Mario Draghi announced to do anything necessary to preserve the Euro-Zone and to avoid a break-up of any member state. The plans to expand the ESM funds certainly work with this statement. However, Draghi’s comment sounds fatalistic and martial, and he was using terms we are usually used to a situation when imminent failure is nigh and inevitable. Evidently, we are facing such a situation again, and Draghi was obviously panicking already.

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