Euro rescue efforts: rearranging the deck chairs on the Titanic?

Posted: May 15, 2011 in Uncategorized

How ironic would it be if the Euro was brought down by a sex scandal rather than a financial scandal? While it’s not likely that the arrest of Dominique Strauss-Kahn, head of the International Monetary Fund (IMF) on charges of sexual assault, could bring down the entire Euro zone, surely it won’t help. The IMF is busy distancing itself as much as possible from Strauss-Kahn, refusing to comment on the matter and appointing an interim director. However, despite protestations that business at the IMF will continue as usual, it’s no secret that negotiations over Greek debt are at a delicate juncture.

The Greek debt issue is just one that the Euro zone is attempting to juggle in an increasingly desperate effort to keep the Euro afloat. Greece, the first of the PIIGS (Portugal, Italy, Ireland, Greece and Spain, the economically weakest member of the Euro zone) to receive a bailout, will need at least 60 million Euros in addition to what it’s already received to stay afloat through the next couple of years. Whether that amount will be sufficient isn’t known, especially as the interest rates that Greece pays in the bond market keep skyrocketing while economic growth rates drop like a rock. The timing couldn’t be much more fraught for the IMF, Greece and the Euro zone, given what’s at stake.

Portugal’s need for assistance is also on the table at talks scheduled to begin tomorrow; Portugal will likely receive 78 million Euros in what is described as pretty much a done deal. But the Greek issue is a difficult one for several reasons: Euro zone officials are annoyed that Greece hasn’t undertaken IMF-mandated austerity measures required to qualify for additional aid, while Greece has no way to grow itself out of it’s deficit and faces years of negative or no growth. The bottom line is without that additional aid, Greece will be in deep trouble. Strauss-Kahn is seen as a prime mover in lining up support behind more funding for Greece; whether his absence from the negotiating table will make or break the additional funding for Greece remains to be seen.

It’s not hard to wonder whether these increasingly frenzied attempts to prop up the Euro are a financial version of rearranging the deck chairs on the Titanic. It’s getting kind of insane, with serial bailouts that aren’t addressing the systemic problems in the Euro zone in any way, shape or form. There’s also almost an hysterical disconnect with reality. Everyone knows that it’s very unlikely that Greece will actually be able or willing to hit the Euro/IMF mandated austerity targets it agreed to, but we’re assured that they will do what needs to be done. I know that you know that we know that they know that it won’t happen. I’m getting a headache.

And that’s just Greece. No wonder the Greek voters aren’t in favor of further austerity, after watching Ireland’s economy contract 1.6 percent in the 4th quarter of 2011. Overall, Ireland’s economy has shrunk by 12 percent in the past three years, according to Reuters. Ireland is also likely to have trouble meeting fiscal and debt targets agreed to in it’s Euro/IMF bailout. And the Euro zone hasn’t even started to deal with potential trouble spots in Italy and Spain. At some point, it’s not hard to see that Greek voters, and perhaps it’s politicians as well, might decide that leaving the Euro is less painful than staying.

The Euro zone was a great party while it lasted. In good economic times, it didn’t matter that one country after another wasn’t abiding by fiscal rules, because everyone was having too much fun participating in various bubbles. But when the global financial crisis hit, the lack of political and financial unity under the surface of the seemingly prosperous Euro was exposed.

Political and financial leaders have an enormous stake in keeping the Euro zone from falling apart: not only would that spark a sovereign debt crisis, but already fragile Euro zone, British and American banks would be hit, hard. That very well may be the next financial crisis, one which would make the last one look like a walk in the park. Unfortunately, for all of efforts of the great and powerful, it does seem like we’re seeing the beginning of the end of the Euro zone, at least in the greater European context that it’s founders envisioned. Who knows how long the great unraveling will take, but in the absence of fundamental changes on the part of individual, European, British and American political and financial leaders, the question seems more of when, rather than if, the Euro zone will see it’s first defections.

Not surprisingly, the #DSK story is all over the news, along with analysis of the implications for the Euro debt crisis. Here are some of the most interesting stories I’m seeing:

  • Sex, lies and the reckless choices of the powerful: an interesting analysis of the intersection of sexual harassment and assault in politics and why the mighty fall presented by Reuters.
  • No he Kahn’t: dissects why the arrest virtually kills any chance that Strauss-Kahn will run for President of France under the Socialist banner and why the Euro zone talks on the debt crisis have been roiled by this news from an Economist blog.
  • DSK arrest: IMF’s Strauss-Kahn, power broker in Paris and Washington: provides some interesting and timely background on Strauss-Kahn, including the fact that he’s been previously investigated by the IMF for possible abuse of power by CNBC.
  • On Strauss-Kahn’s arrest: speculates that DSK’s arrest may spell the end of European control of the IMF and that things are going to get tougher around Eurozone bailout issues, by Roberto Foa of the EUObserver blog.
Thanks for reading; if you’re interested in my rantings about the Euro, DSK and other topics, follow me on Twitter @lecreative.
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Comments
  1. Susan Weiner says:

    Wow, you have strong feelings on this topic.

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