Peter Zeihan, Vice-President of analysis at Stratfor, describes how the European agreement on “upgrading” their bailout fund has worsened their financial position and how the Greek government’s referendum could end the euro zone.
The European summits of last week were largely failures, and this week we’re seeing the beginning of the endgame for the euro. At those summits, the Europeans, led by the Germans, decided they would not put any more money, of their own anyway, into the bailout facility. Instead, they decided to build a leveraging system, the specifics of which are yet to be designed.
In the old system, the European Financial Stability Facility (EFSF) granted full sovereignty guarantee so that you’d know that in the worst-case scenario you would get your money back. In the new system, at most 25 per cent of your investment is guaranteed. These changes have actually weakened the European financial position. By removing the full sovereign guarantees, the Europeans of dis-incentivised outside participation in the bailout programs. Unsurprisingly, when EFSF chief Klaus Regling travelled throughout East Asia since the summit, he got little more than polite talk rather than any firm commitments. The Chinese aren’t interested; neither are the Japanese. No one sees a reason to bail out the Europeans should they not be willing to bail out their own house.
The recent bump in the markets, therefore, is a wholly temporary phenomenon that will only last until the next bit of bad news pops up. Almost on schedule, that bit of bad news happened Monday — only five days after the European grand solution was announced. The Greek prime minister announced that he would be holding a referendum on the bailout package agreed to at the summit. Now this is not automatic. First, the government has to survive a confidence vote — that happens Friday, November 4. Then, the Greek Parliament has to vote to approve the specific text. The date of the referendum would probably be happening just after the new year.
If the Greek people are actually asked whether they approve of the Germans permanently monitoring their finances, a 1/3 drop in their standard of living and the shuttering of 1/5 of the jobs in a decade-long constriction on credit at the government, consumer and corporate levels, they are going to say “no.” And that means the end of the euro zone.
Currently Greece can only service its debts because it’s being helped by the bailout programme. Without that programme, Athens would default almost immediately. A euro zone state defaulting on its debt would result in a seizing up of European capital markets that would make it impossible for the weaker euro zone states, most notably Italy, Belgium and Spain in that order, to finance anything, much less the euro 400 billion they need just in 2012 for normal operations. It would also cause a catastrophic banking crisis of the scope similar to everything that’s happened to this point put together. The only way that this could end with anything other than overlapping crises that overpower and break the euro zone would be if there was a very large bailout fund pre-capitalised to deal with such a multi-vector crisis. But because the Europeans didn’t want to risk their own money, they don’t even have a small fund right now.
There is, however, one small bright spot in this. We will soon know — very soon we will know — if the referendum will be held, and what date it will be on and what the text of the referendum will be. That will give Europe something that has lacked to this point in the crisis — a firm deadline with a known consequence of failure. Until now, the only cost of failure has been a deepening recession, slowly rising finance costs, slowly growing political protest and general malaise. The road has gotten slowly steeper and rockier but there have been no clear and decisive signposts. A Greek referendum would lay out in brightly blunt terms that the entire European experiment is doomed without dramatic action. And if anything is going to prompt the Europeans to pay for the peace and prosperity that the European system has granted them to this point, it will be the sudden realisation that it’s all about to go down in flames — not on some hazy future date but on a specific day this coming January.
Reprinted with permission from www.stratfor.com
