Saturday, March 30, 2013

The Next Step in Europe's Implosion

Rome wasn't built in a day and the Eurozone will not collapse in a day.  But, the Eurozone will collapse.  It's just a matter of time.

Consider the stronger countries in the Eurozone -- Germany and France.  Both economies are now contracting.   Meanwhile their debt levels, acknowledged and unacknowledged, have exploded to new levels.   Both countries are now in the situation that faced Greece four years ago.  So, how is their future going to be any different that what is now taking place in Cyprus, Greece, Spain and Italy?

The ECB ministers are a group of political hacks who know little or nothing about economics (something they share with the Obama advising team).   Their idea of improving the economic plight of the Eurozone is to increase the level of debt, continue to implicitly guarantee profligate spending and bureaucratic regulations, and plunge the Eurozone into the economic dark ages.

GDP is falling, debt is rising, unemployment is rising, and recriminations are flying.  The Eurozone is coming apart at the seams.   Civil society has broken down in Greece and is in the process of breaking down in parts of Spain and Italy.  Cyprus is entering a dark period.  Nothing good lies ahead for the Eurozone.

So, what happens next?

Deposits will begin to seep out of the Eurozone -- most notably from Spanish and Italian banks -- but from other Eurozone countries as well.  After all, the ECB bureaucracy has changed the rules.  Deposits are now legitimate targets for the bureaucrats.  It wasn't the ECB that decided not to confiscate insured depositors in Cyprus, it was the Cypriot parliament who refused to ratify the ECB and IMF policy of confiscating insured depositors.  The confiscation of government insured deposits is now a legitimate policy weapon in the Eurozone, overturning a long past history of FDIC-like guarantees in the Eurozone.  Nothing is sacred to the bureaucrats.

The genie cannot be put back in the bottle.  The European banking sector cannot recover from this bureaucratic policy blunder.  Deposits in the Eurozone can never be considered secure, even in circumstances where the bank that houses them is secure.  The government can confiscate deposits wherever they may be.  This is now a legitimate Eurozone policy weapon.  It is also an IMF (read USA) policy tool as well.  Even US FDIC-guaranteed deposits may be fair game to the bureaucrats when US debt woes become a front page crisis.  An eventuality that must come in time.

No comments: