Saturday, September 24, 2011

Carney: €1 trillion to bail out Europe

We're all used to the concept of "shock therapy" when it comes to finances.   Canada went through that process a decade and a half ago in an unpopular but successful attempt to balance the budget and start paying down our debt.   We're running deficits, certainly at a level higher than would be truly prudent but our debt-to-GDP ratio is much lower than it was in years past so it isn't too much of a concern.    We're seeing the suicide mission the United States is on right now with a "poison pill" set to kick in at year's end if Congress doesn't get its act together (50% of mandatory cuts from the military, 50% from the other departments).

This morning, Mark Carney, the Governor of the Bank of Canada, said that Europe is in such a mess he figures it'll take € 1 trillion (about $1.35 trillion US at current rates) -- that's one followed by twelve zeros Euros -- to knock the continent's finances back in shape.   And notably it's not just Greece, it's all seventeen countries in Euroland.   Even worse, said Carney, even if Greece still had the drachma it would've still had to make a major restructuring even with a devaluation.

There is much to be admired about Europe's social systems which put even Canada's to shame.   Theirs is a continent that truly values families rather than just talk about "family values."   But choices have to be made and governments can't be all things to all people.  I've always felt that while tax systems can be restructured to reduce the burden on families -- including enriched negative income taxes rather than a so-called "universal" payout that is still taxed -- choices have to be made.

In Greece's case, a lack of an effective tax collection system until relatively recently is quite shocking for a modern democracy, indeed the mother of all democracies.   How can one pay the bills if everyone thinks they can game the system -- and I do mean everyone?

It's the same in most countries to be sure, here in Canada we get contractors all the time who say they can give us a "discount" (waive the HST / GST) if we waive our right to an invoice.   The risk we're taking in the short term is if we need a second repair there is no warranty.   The longer risk term is no money to pay for what we come to rely on, or the police to enforce the laws, or the military to fight the new wars we're facing including terrorism and piracy on the high seas.

But there is simply no excuse for the EU Commissioners who should have done far better due dilligence on the country's finances before inviting it to join the Euro common currency.   I don't think it's a question of expelling a country -- once you're in the zone you're in.   But the remaining prospective candidates should show a consistent pattern of fiscal prudence, say over a four year term even during tough times, to be let in.

The trillion facility is there and should hopefully knock things into balance.   But that is money that could be used for other priorities -- infrastructure, for one.   We don't need falling bridges and collapsing tunnels to remind us of that.

I just shake my head at the double standard, however.   If a third world country ran up that kind of balance sheet we'd impose the kinds of controls that are the very reason why the World Bank and IMF are so hated there.   Or we just throw more money after bad, especially when there's a dictator we're trying to appease.   But we have no problem when it comes to a country with a majority white population.   The world bailed out the UK in 1975, and for reasons that had little to do with the EU or its pillars.   So the precedent was set then and it was a bad one.

It really didn't have to come to this.

1 comment:

Koby said...

Carney: "The issue is, can European authorities put in place an alternative for these countries so that for a period of time ... while they take the necessary fiscal actions and other reforms"

One, The notion that governments can cut their way out of this is ridiculous. Greece is a great case in point. After the first austerity package came into effect, unemployment went from 10% to 16%, GDP shrank by 4% and the deficit grew by 8%!

Second, the crisis was not brought on by out of control government spending! Ireland and Spain, for example, had been running surpluses when this all began. A far better explanation is the large capital accounts deficits that each of the PIGGS incurred since the introduction of the Euro; this made them very vulnerable in the face of downturn. Of course, where this all feeds back to the core countries is that banks there were already vulnerable and severally under capitalized when the debt crisis in the periphery hit. By way, this is third major crisis in row were large capital accounts deficits played a role. Keynes was right. We most certainly need capital controls.

Third, the performance of the European central bank has been abysmal. For god knows what reason, the Bank has has raised interest rates and not lowered them. Worse, again fearing that inflationary boggy man the European bank only started buying Italian and Spanish bonds after the yield on both exceeded 6%.

"Europe is in such a mess he figures it'll take € 1 trillion (about $1.35 trillion US at current rates) -- that's one followed by twelve zeros Euros -- to knock the continent's finances back in shape. And notably it's not just Greece, it's all seventeen countries in Euroland."

That is not what he said.
"Carney said European officials have to ensure financial institutions have enough capital and that the European Financial Stability Facility — the fund created in May 2010 to inject cash into BANKS in the region in the event of a financial crisis — is large enough.

"And the complication there is, we're talking 17 different governments, we're also talking about the European Commission and the European Central Bank, so there are a variety of players that have to take the decisions along the same lines, at the same time," he said."

Carney is saying that the governments of Europe have to set aside another 1.3 trillion in public monies to bail out the banks. He also points out that such an operation will be difficult given the dollar amount and the number of players involved. He forgot to add that European governments have already spent trillions bailing out the banks already. For example, Ireland's debt to GDP ratio doubled over night when it bailed out its banks. The real PIIGS are not the governments of Europe but its banks.