C’mon Angela, Let Them Greexit

by David Stockman, Contra Corner

With each passing day it becomes more obvious that Europe is heading for an epochal financial conflagration. So buy-the-dip if you must, but don’t believe for a minute that the US has decoupled.  When the euro and EU eventually implode it will rattle the bones of every gambler and algo left in the casinos anywhere on the planet.

Yes, the school yard name calling and roughhousing now going on in Europe makes it appear that behind the sturm und drang there is some negotiations happening. But the truth is there is nothing to negotiate. Greece is so completely and terminally bankrupt that there is no solution other than default and greexit.

To insist that Greece service the entirely of its staggering $350 billion of debt, as does Germany and the troika apparatchiks, is to advocate the extinguishment of democracy in Greece and its reduction to a colonial mandate of Brussels; and in the process, to eliminate any semblance of economic life among the debt serfs who would inhabit it.

Its just math. Sooner or later interest rates must normalize. For a country with Greece’s profligate fiscal history, there is no possibility that the interest carry cost on a public debt load equal to 175% of GDP could be any less than 6-7% in the absence of EU guarantees.That means that the Greek state’s annual interest bill would approach 10% of GDP before paying down a single dime of principal.

You can’t govern a democracy when one-quarter of revenues are preempted for debt service. That’s especially the case given the  sprawling expanse of the Greek state and the vast dependency of its population on public jobs, pensions and other welfare state entitlements. Indeed, for all the protestations about “austerity” Greece spending ratio to GDP just keeps getting worse.

Historical Data Chart

So what Greece’s fiscal equation amounts to is a deathly political food fight over upwards of 60% of GDP which must be funded with nearly an equivalent tax claim on current income—–since Greece has no credit in any known financial market absent EMU advances and guarantees. Throw in the diversion of a substantial share of the punishing taxes needed to finance the current commitments of the Greek state to lenders and coupon clippers and you have a non-starter.

But try to manage that impossible equation by the writ of remote bureaucrats and non-Greek politicians and you get the clowns of Syriza now, and an uprising in the streets eventually. So the entire predicate of the current so-called negotiations—–that Greece can fashion, enact and adhere to a fiscal plan that actually adds up and that is acceptable to the “institutions”—–is sheer madness; its recipe for an unending gong show which would pale what has gone before into insignificance.

So why do the Brussels bureaucrats and the German politicians insist? At the end of the day, its not really the fact that Germany is on the hook for upwards of $70 billion of guarantees and bilateral loans. Paying up would undoubtedly elicit a political firestorm in Germany, but it would not be a financial calamity. Even a 100% loss would amount to less than 2% of GDP.

No, the reason that Germany persists notwithstanding the outright political calumny being directed its way by its Greek supplicants is that its leader, Angela Merkel, an otherwise sober, conservative and upright politician, believes that Europe will stand or fall on the euro. As she said yesterday in laying the ground work for an eventual new round of kick the can with Tsipras,

“If the euro fails, Europe fails,” Merkel told German lawmakers in Berlin Thursday. “The eyes of the world are looking at how we deal with problems and crises in individual countries of the euro zone. The euro is more than a currency.”

What a historic tragedy. The Euro and the ECB is not the health and future of Europe; it is a massive financial calamity waiting to happen. The fact is, the Bundesbanks’s sound money standard has now been irrevocably stolen and perverted by the socialist politicians and self-perpetuating apparatchiks of Brussels.

There could be no more powerful evidence for that proposition than the antics of the foolish pretender who now runs the ECB. The last thing that Europe’s profligate welfare state governments need is negative interest rates and a massive monetization of their gargantuan public debts. Yet Draghi apparently believes that by destroying what remains of price discovery in Europe’s financial markets and by eliminating the only real incentive for fiscal sobriety that remains—–the fear of soaring interest rates on the public debt—-he is leading Europe toward economic recovery.  In fact, he is leading Europe down a path of sheer monetary and financial madness.

This baleful scenario, of course, is the last thing Merkel would want, as well, if she had a clue about monetary policy and central banking. But the euro has apparently become a magic totem in her mind and that of the German leadership. So Germany stumbles forward pushing the entire project toward an eventual financial and political crash landing.

There is really nothing to stop the blind momentum—-not in France or the other financial cripples of the EMU which remain fiscally viable only due to the money printing campaign of the ECB. So unless Angela Merkel comes to her senses, the true crisis will go unrecognized and unattended.

To wit, the real threat to the peace and prosperity of Europe is not the middling harm that would result from sending the Greeks packing—-back to their Drachma and the massive task of reconstituting their international credit and fiscal self-governance.

No, the enemy of Europe is actually the euro itself. It’s not “more than a currency”; it’s the pernicious emission of a central bank that has fallen prey the statist and Keynesian illusion that nations can print their way to prosperity. Worse still, that this can be accomplished among a bickering confederation of welfare states with declining populations, shrinking work forces, punitive levels of taxation and state intervention and debts which are already at the breaking point.

C’mon Angela. Let the greexit happen. That’s the least of Europe’s problems.


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