21/9/2010 Appenzeller Daily Bell

Appenzell A Daily Compendium

Switzerland of Free-Market Thought

Tuesday, September 21, 2010

Markets Reject EU Austerity?

The IMF itself has become the problem as Europe's woes return ... Once a quorum of big names
says the game is up in a debt crisis, events move fast and furiously. Portugal neared the line on
Friday when Diario de Noticias cited three ex-finance ministers warning that the country might have
to call in the International Monetary Fund (IMF). One spoke of a "reckless reliance on foreign debt";
another spoke of "runaway public spending". No matter that all were complicit in euro membership,
the policy that incubated this crisis and now traps Portugal in its depression. Portugal was a net
foreign creditor in the mid-1990s. EMU has turned it into a net foreign debtor to the tune of 109% of
GDP. That is what happens when you cut interest rates suddenly from 16% to 3%. Be that as it may,
the comments struck a nerve. Yields on 10-year Portuguese debt surged to 6.15%, back to May
D. Strauss-Kahn crisis levels when the EU faced its "Lehman moment" and launched a €750bn (£625bn) rescue blitz.
António de Sousa, head of Portugal's bank lobby, said his members are in dire straits. Banks cannot
raise funds abroad, remain "extremely fragile", and "quite simply" will have nothing more to lend unless foreign capital returns.
– UK Telegraph

Dominant Social Theme: There is still a long ways to go.

Free-Market Analysis: The UK Telegraph remains a mainstream anomaly; articles by Ambrose Evans-Pritchard often do not
buttress the dominant social themes that the power elite is trying to promote. On the other hand, Evans-Pritchard is no free-
market monetarist. He seems to believe in paper-money and central banking and does not necessarily advocate a money
metals standard. Thus, his non-thematic views on the EU and the euro provide him with a credibility that burnishes the
unfortunate monetary authoritarianism that he espouses elsewhere.

Evans-Pritchard is not alone in presenting this sort of stance. Many good mainstream financial reporters take eminently
sensible stances on numerous issues but then, unfortunately, cannot find it within themselves to confront the reality of central
banking – that is it a money-fixing exercise that inevitably distorts the larger economy with ruinous consequences.

And yet ... having made the above points, we regularly doff our collective cap to Evans-Pritchard and those like him when they
turn their ferocious intellects on targets that they are not reluctant to confront. Evans-Pritchard especially has been merciless
in his analysis of the quagmire that is the European Union – and in the above article-excerpt on the IMF as well.

He correctly noted the stresses and strains that the EU is subject to financially and has been in the forefront of predicting the
additional dilemmas generated by this unfortunate experiment. As far as the IMF goes, here is trenchant criticism indeed: "In
any case, the IMF itself has become the problem, operating as an arm of EU ideology under Dominique Strauss-Kahn (above
left). It offers no remedy since it acquiesces in the EU's ban on debt-restructuring."

Additional relevant statements come later in the article as follows: "The brutal truth is that Portugal lost competitiveness on a
grand scale on joining EMU and has never been able to get it back. ... Ireland has shown what happens when you grasp the
fiscal nettle, slashing public wages by 13pc – to applause from EU elites – without offsetting monetary and exchange stimulus.
Irish bonds have spiked even higher to a post-EMU record 6.38pc. ... Citigroup's Willem Buiter said Ireland 'may not be able to
make whole' creditors of both sovereign debt and the bank. Dr Buiter has also said a default by Greece is a high probability
event'."

So there we have Evans-Pritchard's condensed perspective: Portugal, Ireland and Greece continue to struggle with the
overwhelming public debt and austerity is not the solution to public debt. In fact, the fiat-money distortions that the PIGS suffer
from run like fault lines throughout the entire economy; devaluations are an appropriate solution but not one that the EU
contemplates. Why not? Comes the answer at the end of the article: "In fairness to EU policymakers, perhaps the problem
really is so big that if they let Greece, Portugal, or Ireland restructure debt they risk instant contagion to Spain, and from there
to Italy. Perhaps they really have no choice. If so, monetary union has created a monster."

Of course this gloomy assessment is offset by others. Here's an excerpt from a much more upbeat perspective by Michael
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Elliott, editor of Time International, which just appeared in Fortune magazine:

The truth is that the European economies are doing better than expected. Everyone knows about Germany's stellar
performance this year, with an unemployment rate now lower than it was in summer 2008 (in the U.S. it is 3.5 percentage
points higher), while growth in the second quarter was the best quarterly figure for 20 years.

But there are some bright spots in Europe's peripheral economies too. Consider Ireland. Given troubled banks, a debt
downgrade, and high unemployment -- the July rate of 13.7% was the worst since 1994 -- you might think there was no good
news there. But Barry O'Leary, chief executive of IDA Ireland, the nation's investment agency, says that there has been a
significant "repricing of the economy" since the Great Recession bit. In 2009, Irish public sector pay was cut as an austerity
measure, and O'Leary says private sector salaries have followed suit, with reductions of 10% to 15%. The IDA is now once
again seeing investors who want to develop manufacturing capabilities in Ireland, the sort of labor-intensive operations that
had lately seemed destined to always go Asia's way.

... And so has this truth: Europe remains the world's most populous area of widely distributed prosperity, long life, and good
health. They're doing something right over there. Long may the dogs not bark!

Here are two mainstream media views, then, with markedly different conclusions. On the one hand is the Telegraph
presenting the point of view that the bond market itself is rejecting the EU solution, which has amounted to Draconian
domestic public sector budget cuts for affected countries plus the creation of a loan pool to ensure that weakened countries
do not default. On the other hand is Fortune, presenting the point of view that the internal balance sheets of countries like
Ireland have benefited from the EU's actions and are happier than one might expect.

How are we to parse the differences between these two points of view? We can state definitively that a regional monetary
union (the EU) that has not carried forth an internal audit for perhaps half a decade or more and has taken to regulating such
obscure matters as whether British farmers can sell eggs by the dozen (they cannot) is not an entity that will support
"prosperity, long life and good health" in the long run. In fact, we would argue that these admirable qualities were generated
not by the EU but by individual countries themselves. That the EU has inherited this state of affairs is indisputable; let us see
how long it takes for the Brussels' bureaucracy to ruin it.

As to the larger issue of whether austerity and a "trillion dollar" loan pool have effectively recast the current sovereign debt
problem – well, we are skeptical. Our skepticism is not "knee jerk" (though we find the entire EU "experiment" to be
despicable) but has to do with the relationship of managed economies to the free market. As a free-market publication, the
Bell is of course apt to reach this conclusion. The EU basically bribed the elite of the PIGS into joining the union. It poured
money into these countries, allowed the elites to basically pocket the funds in return for support of a "United States of Europe"
and is now leveling pan-European austerity programs in an attempt to sustain the EU scheme.

Conclusion: As we have pointed out many times, austerity in a fiat-money environment is a punitive affair. In a free-market, a
person might have to take a dive into icy water from a few feet up to accomplish "austerity." In a fiat-market economy, one is
forced to climb to the highest platform before diving in. The result can be painful indeed, especially for the unprepared. And
purely from a monetary-policy standpoint, we are not sanguine about European solutions. The EU itself a product of massive
sociopolitical and economic manipulation. That manipulation has ended in tears and potential sovereign defaults. The
solution? Embark on yet another EU manipulation! (Austerity, etc.) How long can such strategies remain viable? Do trees grow
to the sky?

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