To the delight of equity markets, ECB president Mario Draghi has announced officially that the European Central Bank will purchase Eurozone bonds in the secondary market, with three-year maturities, theoretically without any limits. In effect, Draghi has told the world that the ECB will run its printing presses at warp speed, and conjure out of thin air whatever quantities of euros are required to combat what Draghi calls “market distortions.”
The Bundesbank opposes the move, and Germany’s traditional fear of inflationary policies by central bankers will no doubt be awakened. Draghi’s position is that he has no choice, if the euro is to be saved. His policy measure reminds me of what a U.S. Army officer once said, after his unit destroyed a village during the Vietnam War: “We had to destroy the village in order to save it.” Draghi may have unleashed a desperate policy measure which, in attempting to save the euro, will ultimately bring about its demise.
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With the markets giving the proverbial “thumbs down” to the deficit-financed Eurozone/IMF bailout of insolvent Greece, the value of the once might euro in relation to a basket of key currencies is sinking at warp speed. It is quite clear that the Eurozone bailout is a panicked-induced attempt to save the euro from its own contradictions. However, it is a futile attempt that is doomed to failure, in my view.
A monetary union involving 16 vastly different economies with asymmetrical fiscal policies is nonsensical in the extreme. A common currency may have made sense for a limited number of major European economies, however the current matrix is unsustainable, despite the willingness of European politicians to bankrupt their citizens in a fool’s errand attempt to save what is doomed.
Greece is now convulsed in social unrest, an entirely predictable outcome that is bound to get more serious as the full severity of the IMF and Eurozone austerity measures take full affect on the Greek workers and taxpayers. Supposedly this is all being done to prevent a contagion from infecting other European economies with high deficit to GDP ratios. The painful reality is that the pandemic is already beyond the borders of Greece. It will ultimately savage every nation-state existing in a neo-Keynesian fantasy of infinitely-expanding sovereign debt. This includes not only the Eurozone, but also the UK, Japan and ultimately the United States.
Greece is a window into the next phase of the global economic crisis. The euro may very well be an early casualty of what is unfolding into the deepest systemic crisis of modern capitalism since the Great Depression of the 1930s.
In my book, “Global Economic Forecast 2010-2015: Recession Into Depression,” I project that a growing sovereign fiscal crisis will transform the current Great Recession into a synchronized global depression. The events currently transpiring in the Eurozone are early indicators that my forecast is on track.
At the recent summit of European Union leaders in Brussels, which included the head of the European Central Bank, the PR spin doctors released what can best be described as ambiguity in the form of a communiqué, offering unspecified assurances that the Eurozone’s major actors will not permit Greece to succumb to its current sovereign debt crisis. The hope was that the markets would buy this assurance, thus preventing a further slide in the euro.
Not only are the markets, at least terms of the euro’s relative value, not being reassured by the happy talk that emanated out of Brussels; upon his return to Athens, Greek Prime Minister George Papandreou was harshly critical at the lukewarm words of EU reassurance. He said, “in the battle against the impressions and the psychology of the market, it was at the very least timid, ” in referring to the EU communiqué.
The bottom line is that without a massive bailout by the big guns in the Eurozone, in particular Germany and France, Greece faces fiscal collapse, which in turn will prove destructive to the whole Eurozone. However, if indeed Greece is bailed out, a host of other insolvent EU members using the euro will be lining up for their bailouts. Even ignoring the feelings of the German and French taxpayers (which is not politically tenable) there simply is not fiscal capacity within the Eurozone to backstop the other potential sovereign basket cases.
I foresee no possible scenario that allows for a soft landing from this escalating sovereign fiscal and debt crisis.
