Euro crisis: “The euro area crisis has reached end game…”

The Italian finance minister, Giulio Tremonti, has held crisis talks with  Jean-Claude Juncker, chair of the Eurogroup of finance ministers.  The Spanish Prime Minister,  Jose Luis Zapatero, “has postponed the start of his holidays” to keep “an eye on the international economic situation.”  Both countries’ bond yields have reached their highest rates in 14 years, and are considered to be at unsustainable levels.  As the Guardian reports, the stock markets have taken fright “as fears grew over the health of the global economy and the ongoing European debt crisis.”

“Astonishingly!”, natch.

Dan O’Brien, in the Irish Times, with a cheery assessment…

As the debt crisis goes critical, it is worth reflecting on how big is the change taking place. Just three years ago, people in the rich world – Europe and the US – enjoyed August free of any care that the wealthiest states in human history would go bust.

This August, there are legitimate fears that many governments in the rich world will not be able to fund themselves, leading to outcomes of potentially Armageddon-like proportions which could alter peoples lives more dramatically than any single event in many decades.

How the world has changed in 36 months.

[Europe is still sexy! – Ed]  Of course it is.

To be fair, for supporters of the “European Project”, the options are stark.

And when it’s that serious, you have to lie…

Adds  Some important points from BBC Europe editor, Gavin Hewitt

Here’s the problem: The markets look at many European economies and see high debt, high unemployment, low growth and fragile banks. The sums don’t add up. Where will the growth spring from to bring down the debt?

With Greece they have seen a second bailout that will result in private investors taking losses. Suddenly buying up a tranche of European debt doesn’t look very attractive.

In the past two days borrowing costs for Spain and Italy have reached 14-year highs. The President of the European Commission, Jose Manual Barroso, said the market pressure was “clearly unwarranted” but was cause for “deep concern.”

Finnish Prime Minister Jyrki Katainen described what was happening as a “a very alarming and scary thing… The whole of Europe,” he said, “is in a very dangerous situation.”

Europe’s vulnerable economies often don’t help themselves. Austerity packages are often not what they seem.

And, crucially

The key challenge is growth, but an equal problem is political.

Some politicians have openly said that the answer to the crisis is “more Europe”. Others accept that the more prosperous countries like Germany will have to end up bankrolling the weaker countries if the eurozone is to survive. That is not what the Germans signed up for. As so often happens in Europe, officials are pulling in one direction and voters in another.

At some stage – if it materialises – fiscal union will have to be put to the voters. It cannot be slid through by stealth or incrementally.

Down the road a great tussle lies between those who want a closer Europe and those who want a looser, more pragmatic Europe. That struggle is always there but it is being brought closer by the continuing eurozone crisis.

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  • Pete Baker

    Adds Some important points from BBC Europe editor, Gavin Hewitt

    Here’s the problem: The markets look at many European economies and see high debt, high unemployment, low growth and fragile banks. The sums don’t add up. Where will the growth spring from to bring down the debt?

    With Greece they have seen a second bailout that will result in private investors taking losses. Suddenly buying up a tranche of European debt doesn’t look very attractive.

    In the past two days borrowing costs for Spain and Italy have reached 14-year highs. The President of the European Commission, Jose Manual Barroso, said the market pressure was “clearly unwarranted” but was cause for “deep concern.”

    Finnish Prime Minister Jyrki Katainen described what was happening as a “a very alarming and scary thing… The whole of Europe,” he said, “is in a very dangerous situation.”

    Europe’s vulnerable economies often don’t help themselves. Austerity packages are often not what they seem.

    And, crucially

    The key challenge is growth, but an equal problem is political.

    Some politicians have openly said that the answer to the crisis is “more Europe”. Others accept that the more prosperous countries like Germany will have to end up bankrolling the weaker countries if the eurozone is to survive. That is not what the Germans signed up for. As so often happens in Europe, officials are pulling in one direction and voters in another.

    At some stage – if it materialises – fiscal union will have to be put to the voters. It cannot be slid through by stealth or incrementally.

    Down the road a great tussle lies between those who want a closer Europe and those who want a looser, more pragmatic Europe. That struggle is always there but it is being brought closer by the continuing eurozone crisis.

  • Alias

    Gavin Hewitt gets to the core of it. Repayment of debt is a process of extracting wealth from the system and putting it into another part of the system. That works in a sovereign state where the wealth is reinvested within the state to create more wealth but doesn’t work when the wealth is extracted from the system and exported to a foreign state. The exported wealth cannot be reinvested, and so new wealth is not created by it. That means that the state becomes less productive, and so it cannot be expected to meet its repayments from the creation of new wealth. However, the EU is telling the markets that these wealth-exporting states can do exactly what anyone with even a basic grasp of economics knows is impossible.

  • CharlieMcCarthy29

    If Italy, a member of the G8, is in trouble, it may well be the death Knell for the Euro. Interesting times ahead; I hope that my investment company is buying gold, or at least, gold stocks.

  • ben_w

    “As the crisis goes critical”, as crises are wont to do.

    After three years of this crisis, how much of a crisis can it be? Isn’t it the new normal at this point?

  • nightrider

    http://www.bbc.co.uk/news/business-14396557

    Buy Gold if you can afford it. And keep it safe somewhere.
    Do not tell anyone you have it.

  • Harry Flashman

    My adviser told me I needed gold in my portfolio eighteen months ago, I was rather reluctant as I figured the gold bugs had already pushed the price high enough however I did agree to put a modest amount into gold and indeed it has made a nice profit so far.

    My problem is that he didn’t post me a parcel of gold ingots which I could hide under the floorboards. He put me into a gold fund which when I think about it rather defeats the purpose of gold, I mean if it really all does go tits up and feral mobs are roaming the street and I need to buy a sack of rice my statement from the gold fund isn’t going to be much use is it?

    How precisely do I intend to get my hands on the gold which I allegedly own when, God forbid, the time comes when I actually need the stuff?

  • CharlieMcCarthy29

    Harry,
    I haven’t got any ingots myself, no matter how small,. But I suggest you ask your financial adviser how to get your hands on the stuff. it has been possible to do that in the USA for 10-15 years or so. I know you live elsewhere so check it out.

  • Harry Flashman

    I know how to buy gold, living in Asia buying gold is as easy as buying bread but to buy the quantity of easily negotiable metal, in the form of coins or bullion, that could be of use in an emergency, ie total societal collapse, would be a physical and security nightmare.

    Where do store your tens of thousands of dollars (anything less would be pointless) of gold? How do you build the requisite strong room facilities without attracting the attention of others? How do you buy such large amounts without telling everyone in town what you’re doing? How do you transport it securely to your home? What measures do you take to secure your pot of gold when the orcs come calling? If something happens to you how does your family get their hands on your stash? How can you trust them not to pinch it and run off to Vegas when you’re sleeping?

    No, if total societal collapse happens the gold bugs just get to live a few days longer than the rest of us. Unless they have also stocked up on food, firearms, lots of ammunition, a reliable clean water supply and a private energy source then their end is just as assured as us fiat currency holders with the difference being that their deaths will probably be a lot more violent.

    I’ll take my chances on US$, GBP and AUS$ in cash in various accounts, commercial and residential property, stocks and bonds, a small commodity business and a big garden full of fruit trees, vegetables and a good well. When Armageddon happens I’ll open my bottle of forty year old malt whiskey and take the wife and kids for a nice long car drive in my locked garage and leave the goldies to fight for the rest.

  • CharlieMcCarthy29

    I like the whiskey suggestion. But you’ll probably need some vintage wine for the missus and pop for the kids.

  • Alias

    Harry, most folks would store it in a safe deposit box but that would rather defeat the purpose of buying it given that banks will collapse. Plus, of course, Franklin D. Roosevelt confiscated gold stored in banks in 1933 so history might repeat itself there. Krugerrands or sovereigns, et al, are a good option but gold can be acquired in any form and hidden anywhere.

    It isn’t a case of buying it to use it as barter but rather buying it so that it can be converted back into whatever (stable) currency replaces the collapsed currency when it becomes worthless. Your existing currency will reduce to its pulp value but gold will not.

    You could, of course, transfer your money into a stable currency that is not overly exposed to EU debt and is not overly exposed to debt from states that are overly exposed to EU debt, but that requires some intricate calculations.

    We are living in an era where folks believed all that guff about the omnipotent Nannystate protecting them from all harm and big government doing no wrong, so most folks are living in a state of denial about the level of risk and what will happen to them when the Euro collapses. They still think ‘it’ll be all right on the night’ because of that guff.

  • Harry Flashman

    “We are living in an era where folks believed all that guff about the omnipotent Nannystate protecting them from all harm and big government doing no wrong, so most folks are living in a state of denial about the level of risk.”

    Couldn’t agree more, as a long term visitor to Asia I have been disabused of the notion that the state is some nice benevolent uncle that will look after you from cradle to grave and that financial institutions are there to look after your interests (why does any fool still have a pension administered by someone else?). They are both mean and voracious beasts that will eat you and your family alive if it suits their interests.

    I provide for my own family’s health care, education and welfare and I do so a damn sight cheaper and more efficiently than if I was handing over 40% of my income to some government worker so that I could be told which queue to join when I need help.

    No, the generations that grew up in western societies after WW II were very lucky, never before has any society lived as comfortably and as securely as we have but that golden age is well and truly over, turns out it was all a ponzi scheme anyway.

    It’s dog eat dog from here on in and we better get used to it as it’s not going to be pretty.

  • CharlieMcCarthy29

    Harry,

    I think I’m ok, reaching the end of my lifespan and having been a good saver along with my wife, But I do fear for my wife who is a number of years younger than me and for my kids, grandson and nieces and nephews. The fear, as for you, lies in the continuing future value of fiat money. I have thought about buying gold or property with our savings but if there is a complete collapse in, for example, the financial system or food production, I think I will be no match to those who have bought guns instead.

  • Harry Flashman

    If I lived in the States I would certainly take advantage of the Second Amendment and be investing in one or two cheap AK47’s with a few boxes of ammunition. One doesn’t want to sound like a survivalist nutter but the times they really are a changing.

    I’m not quite reaching the end of my lifespan but I’ve had a good half century and can’t complain about how life has treated me, if I have to economise a bit in the years to come it’s no big deal, heck I slashed my spending by an easy 50% back in 2008 and I haven’t missed out on anything important.

    As long as there’s cheap booze and enough basic grub to get by I’ll survive but like you Charlie it’s not me but my wife and kids I worry about. They will only be able to dream of the sort of comfortable, peaceful world we grew up in.

  • Toastedpuffin

    Guardian reporting sharp dip in gold prices:

    “Rumours were swirling around the City that hedge funds were being forced to sell assets such as gold in order to cover deepening losses on other investments.”

    Harry, your (excellent and highly entertaining) posts have left my mind with an odd psychic aftertaste of Mad Max and Lidl……

  • DC

    Mad Max and Lidl

    Nice combo.

  • nightrider

    The Guardian and The Telegraph are, apparently, at odds:

    http://www.telegraph.co.uk/finance/personalfinance/investing/gold/8678682/Gold-to-hit-2000-before-year-end.html

    However, economics and mathematics have, at best, a kind of astrology and astronomy analogy.

    The Guardian favours the former, The Telegraph the latter.

    Take your pick!

  • Harry Flashman

    Neither of those two stories contradicts the other.

    In order to get out of short term losses presumably in some stock trades that have been caught short in today’s plunge some hedge funds are being forced to liquidate their gold holdings. I have no doubt they will be trying to get back into gold, property, cash, commodities or pork bellies, anything they can actually touch, as soon as possible.

    Is this the long awaited second shoe hurtling to the floor?

    Mad Max and Lidl would certainly sum up my thinking beautifully. Joking aside though, I am beginning to get a wee bit nervous, this is going to be rough I fear.

  • Drumlins Rock

    hey its the weekend and we have survived! bit bruised but the world hasn’t ended yet!

  • huntsman

    It is clear to the markets that the present debt levels in Europe cannot be paid back, therefore somebody is going to take a major hit in the medium to long term. The populations of Europe are going to get very tired of paying for the bank debts and will keep throwing out governments until one of them decides to shift the losses, or at least some of them, to the banks. Therefore rational investers are not going to buy sovereign bonds in europe and be part of a future default.

    The euro was a mad idea for Ireland since the country’s two main trading partners are the US and Britain. While the eventual crash of the euro will be painful, it will be better than the present prolonged and futile effort to save the currency. Ireland would not have had the housing bubble without cheap german money and would not have had the subsequent bust, if it had stayed out of the euro.

  • tuatha

    If any doubt that the current financial ‘system’ is entirely based on fiat money, try imagining WHERE all the money supposedly wiped from the world’s stock markets has gone, physically. Of course, the vast majority (70-90% depending on how value is calculated) ain’t gone nowhere coz it never existed.
    When you borrow a couple of hundred grand for a house you don’t take a wheelbarrow to the bank, the debit/credit transaction takes place (electronically these days although the principle was the same even when it was inky fingered Bob Cratchitts perched on high stools with an eye shade) but no ‘wealth’ is magicked out of thin air, it is purely an obligation (the baleful CDOs were merely the apotheosis of this trickery) agreed by one party with another.
    Closer to home, NAMA acquired, initially at book value then later discounted (WHY is a subject of dispute), paper claimed to be worth gazillions when it was merely a figure agreed between dubious characters.
    Taxpayers are liable due to politicians (ignorant or complicit is yet another subject of dispute) agreeing ON OUR BEHALF that WE will pay, in the future, in real stuff like blood, sweat & tears but nowhere can those alleged gazillions be found.
    Apart from weapons & the skill and will to use them against each other, the only defence the ordinary citizen has in the coming turmoil is rule of Law – otherwise your gold, your bricks & mortar or your veggie garden are at risk.
    A quick point of the flight from stocks – it is reported in NY that one of the merchant banks is charging a fee for massive cash deposits because, in the present climate it can’t be on-lent. Effectively a negative interest rate, applied only the mega amounts at the moment but Japan has had such a disincentive even for personal accounts for the last decade of deflation & stagnation and yet they are still the largest savers on capita on this particular planet.

  • Congal Claen

    Euro breakup isn’t going to happen. The Greek, etc debt is being transferred from mainly French/German banks to the EU Central bank. The sham to save Greece, etc is really to
    save the French & Germans. Fiscal union will then be imposed. Could be interesting times for the Republic – continue with the pretence of Europeaness or siding with the other home countries…

  • CharlieMcCarthy29

    China is suggesting that the world might need a new reserve currency. Any suggestions what that would be? Obviously not the Euro but would we trust the yuan?

  • Drumlins Rock

    Congal, think you have it about right there, and I know which option would be better despite being the old enemy. Charlie, should oil become the new reserve currency?

  • CharlieMcCarthy29

    Interesting suggestion, Drumlin’s Rock but I don’t think the worth of a barrel is stable enough.