The Other McCain

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EUROPE IN CRISIS: Sudden Financial Emergency Strikes EU Zone
UPDATE: Götterdämmerung?

Posted on | November 15, 2010 | 12 Comments

These headlines at the Drudge Report outline evidence of increasing stress on European economies:




Is this it? Are we finally approaching global economic Armageddon? Give me a few minutes to sort through what this means.

UPDATE: OK, basic summary from Associated Press:

Europe’s debt crisis spread widening ripples Monday, with Irish officials denying that their talks with other eurozone governments were aimed at getting a bailout, while the Greek Prime Minister accused Germany of making things worse with talk of forcing creditors to take losses.
The flare-up in tension adds to pressure on EU finance ministers, who will be in Brussels Tuesday for their monthly meeting.
After spending their recent gatherings focusing on crisis prevention, a weeklong sell-off of Irish and Portuguese bonds has thrown them back into crisis management.

UPDATE II: Wall Street Journal:

Addressing reporters in Paris, George Papandreou said the Germans’ view — long-held, but recently reiterated — that private bondholders could suffer losses as part of a future bailout was intensifying government-debt woes.
The German position “created a spiral of higher interest rates for countries that seemed to be in a difficult position, such as Ireland or Portugal,” Mr. Papandreou said. He added that the spiral could “break backs” and “force economies toward bankruptcy.”

Read the rest. Germany is the most solvent big country this side of China, and their tough-love approach to the debt-laden PIGS (Portugal, Ireland, Greece, Spain) of the Euro zone is probably the best hope to prevent a total collapse. The “crisis” talk may therefore just be a lot of whining from the PIGS faced with the real consequences of their fiscal irresponsibility.

UPDATE III: The British Independent has some official statements:

Of the nations most at risk from contagion, Portugal has the greatest cause to close down the latest wave of instability before it turns into panic. The country’s Finance Minister, Fernando Teixeira dos Santos, warned that “the risk is high because we are not facing only a national or country problem. It is the problems of Greece, Portugal and Ireland. This is not a problem of only this country. . . . This has to do with the eurozone and the stability of the eurozone, and that is why contagion in this framework is more likely.” . . .
The Governor of the Bank of Spain Miguel Angel Fernandez Ordonez also blamed Ireland for dithering: “The situation in the markets has been negative due in some part to the lack of a decision by Ireland,” he said. “It’s not up to me to make a decision on Ireland; Ireland should take the decision at the right moment.”
“We have no reason whatsoever why Ireland should seek external support. Ireland is well-funded,” said Ireland’s Minister for European Affairs, Dick Roche.

By refusing to agree to an EU bailout, Ireland is increasing the risk of “contagion”? I’m not quite sure why this is so — if Ireland insists it has sufficient credit, what’s the problem? — and perhaps some Euro-savvy commenters can help explain.

UPDATE IV: The New York Times:

European officials, increasingly concerned that the debt crisis will spread, are warning that any new rescue plans may need to cover Portugal as well as Ireland to contain the problem they tried to resolve six months ago. . . .
While some important details are different, the current situation feels eerily similar to what happened months ago in Greece, where the cost of borrowing rose precipitously. European authorities ultimately stepped in with a rescue package, expecting an economic recovery and the creation of new European rescue funds to fend off future panics by bond investors whose money is needed by countries to roll over their debt.
But with economic conditions weakening, markets are once again in turmoil. Rescuing Ireland may no longer be enough. . . .
While Ireland has largely impressed European officials with its commitment to austerity, Portugal has been lagging in this regard, according to European officials. One official in Europe, who asked for anonymity because he was not authorized to speak publicly, said that the budget recently presented by the government in Lisbon did not contain the type of far-reaching changes proposed by other countries, like Spain.
“If Ireland were to ask for aid, then you’d have to look at what’s going on in Portugal as well,” the official said, putting forward a view that to rescue Ireland alone would not keep speculators from zeroing in on other vulnerable countries.

Hmmmm. It’s almost as if officials in Portugal, where the fiscal problem is arguably worse, were trying to use Ireland to distract these “speculators.” But who could they possibly mean? I wonder . . .

UPDATE V: Speak of the devil:

Mr. Soros also touched on the unravelling European debt crisis. Although some people are surprised that Europe is still in trouble, he is not shocked. “The current situation can only be understood as a continuation of the financial crisis,” he said. “We are not out of the woods.”
But he did note there could be even more problems ahead because Germany is starting to dominate fiscal policy.
“Effectively Germany is imposing on the other countries a policy that has done very well for Germany” but not for the other governments, he said.

The Germans, however, are solvent. Since when was solvency a bad policy for anyone?

UPDATE VI: Welcome, Instapundit readers! Professor Reynolds links the ever-quotable Ambrose Evans-Pritchard, who issues dire warnings:

Unless the [European Central Bank] takes fast and dramatic action, it risks destroying the currency it is paid to manage, and allowing a political catastrophe to unfold in Europe.
It was a grave error for Germany’s Angela Merkel and France’s Nicolas Sarkozy to invoke the spectre of sovereign defaults and bondholder “haircuts” at this delicate juncture, ignoring warnings from ECB chief Jean-Claude Trichet that such talk would set off investor flight from high-debt states. . . .
If mishandled, Ireland could all too easily become a sovereign version of Credit Anstalt – the Austrian bank that brought down the central European financial system in 1931, sent tremors through London and New York, and set off the second deeper phase of the Great Depression, the phase when politics turned ugly. . . .
The eurozone’s fiscal fund (European Financial Stability Facility) is fatally flawed. Like Alpinistas roped together, an ever-reduced core of solvent states are supposed to carry the weight on an ever-widening group of insolvent states dangling beneath them. This lacks political credibility and may be tested to destruction if – as seems likely – Ireland is forced to ask for help. At which moment the chain-reaction begins in earnest, starting with Iberia [i.e., Portugal and Spain]. . . .

Read the whole thing, down to the last word, “Götterdämmerung.” Europe’s situation, as described in frightening detail by Evans-Pritchard, is really that serious.


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