Europe’s Feet of Clay
Want to know what’s on the collective mind of political leaders in Europe and elsewhere? Wait until one of them leaves office—perhaps the only time truth and honesty start to accidentally leak out.
This is exactly what happened after the previous chief of the European Central Bank, Jean-Claude Trichet, stepped down last November and began speaking openly about a bold plan to save the euro:
Europe could strengthen its monetary union by giving European politicians the power to declare a sovereign state bankrupt and take over its fiscal policy, the former head of the European Central Bank said on Thursday in unveiling a bold proposal to salvage the euro.
This is an open declaration of war…there is no power superior to that of the budget within a nation. None. If other nations and firms don't like a government's expression of their sovereign power in the form of their budget they have the right to refuse to lend to it. But there is no claim one can make on a sovereign's budget on a forcible basis — that is functionally identical to an invasion. Trichet has just invited a shooting war in Europe, and I predict that if this sort of meme spreads he's going to get exactly that.
Do you think Trichet understands the implications of his plan? Did he just wake up the morning after he left office and have an epiphany? No. This is an “unofficial” public announcement of how the ECB and European leaders plan to bring about fiscal and political integration of Europe if the situation warrants. Of course, as Denninger points out, this is tantamount to an invasion of sovereignty. The stakes would have to be pretty high for the EU to take over another country—especially without its consent. And that’s where the story gets interesting.
Keep in mind, this would all be done in the name of saving the euro. Allowing Greece to leave and print drachmas would open up a huge can of worms. If Greece leaves, why not other countries? The ripple of uncertainty this would cause within the monetary union would be disastrous. So, as Trichet’s “bold plan” reveals, they will do all they can to make sure this scenario doesn’t play out—even if it means declaring war against a sovereign nation.
Let’s think of how this is playing out in Greece. Most Greeks want to keep the euro and remain in the Eurozone. Let’s imagine this remains true and Greece refuses to leave. Since Greece is broke, this requires bailouts from the ECB through collateral pledged by other nations in the EU, namely Germany. If subsequent bailouts don’t revitalize Greece’s economy, which is almost certain, or other nations refuse to pledge more collateral, eventually something will have to give. That’s where Trichet’s plan comes in: Declare Greece bankrupt and take it over. Such a bold move, however, would certainly require some legal justification. That event might just be what Valentin Petkantchin, an economic and financial analyst at the University of Aix-Marseille III, revealed a few days ago.
Why would an extreme leftist such as Tsipras bother switching to drachmas – with the disastrous consequences for the Greek population and his own political future – when Greece already has the capacities to simply print euros?
Certainly, the idea seems unlikely in normal times and goes against the current European rules and agreements. However, this is a crisis, and it is theoretically very possible. Why?
First, because in case of a clash between Greece and the EU/ECB, the respect of EU rules by Greek politicians may really not be the priority. Especially in a situation of increasing chaos in a country where, for example, a shortage of medicine is taking shape and power cuts are being discussed.
Second, because Greece has the physical means to create any amount of euros it wants. Indeed, by dint of repeating that Greece cannot print its own currency, the politicians and media seem to have been forgotten that the National Bank of Greece does have its own euro printing press – and this in two ways:
On one hand, it can create euros in a few "clicks" under the cover of the opaque Emergency Liquidity Assistance (ELA) program. Greece is already estimated to have created up to 96 billion euros to help its banks using the ELA.
On the other hand, the Greek central bank is able to turn on the printing press the old-fashioned way. As per the EU constitutional texts, printing euro banknotes (and manufacturing coins) has been physically delegated to the national central banks, including the National Bank of Greece. The Mint of Greece (IETA) thus already prints euro banknotes. It has the latest state-of the art printing presses – it just has to keep running them when no one is looking.
Remember, Greece already lied to Europe on the state of its public finances: once in order to enter the Eurozone and then again in 2009, triggering the suspicions of investors. Why not lie again about the amount of euros it is creating? The stakes are certainly higher today.
Such illegal money creation recalls what happened in Yugoslavia in the early 1990s, during one of the worst hyperinflations in history when prices increased by the astounding 5 quadrillion percent between October 1993 and January 1994. The Yugoslav equivalent of the ECB at the time had completely lost control over money creation, while central banks in Serbia, Montenegro, Vojvodina, and Kosovo – in a position similar to that of the Bank of Greece – were heavily printing new quantities of Yugoslav currency.
Turning on the euro printing presses in Greece in a similar way would be less painful for the new leftist government than going back to the drachma, as the main effect would be felt abroad. Instead of the government's massive debt balance being paid with Greek savings, it would dilute the purchasing power of the entire Eurozone. Although it is impossible to be certain if this is Tsipras' true strategy, it is a risk of which euro investors should be aware.
Certainly, the potential for countries taking monetary policy into their own hands by printing euros to meet fiscal needs may just be the legal justification cited for taking Greece or other nations over. Given that they all have the ability to print euros through their own national central banks, limiting their ability to do so may not be that easy. Such a complication may just be the motivation to fire up the printing presses—especially if the alternative means further cuts in spending to basic services and, ultimately, social unrest.
Now, let’s imagine the worst-case scenario: Not only Greece, but other countries start to print euros. Would the EU then take over every nation that tried to do so? Would those nations allow for it? Remember, Germany—having the strongest economy in the Eurozone—pulls most of the political weight. Will Greece and other nations—still harboring animosity towards Germany for past sins—relinquish sovereignty to perceived German control of their government? Not likely.
What’s another option in case the euro-printing by other nations were to occur? Limit or ban the use of physical cash all-together. When you think about it, the concern of money flowing across borders is not so much an issue for printing nations but for the countries that money is escaping into. Run with this scenario for very long and you have police checking every major border and international shipment for smuggled “counterfeit” euros, angry citizens waiting in long lines, much slower economies, and even more contention among an already fragile union.
Will the original dream of a great economic empire forged among the strong and weak nations of Europe finally succeed in the end? Only God knows. However, if I had an interpretation for how this dream will end, it would probably sound something like this:
As the toes were partly iron and partly clay, so this kingdom will be partly strong and partly brittle. And just as you saw the iron mixed with baked clay, so the people will be a mixture and will not remain united, any more than iron mixes with clay.
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