This time the fire-eaters are from the North.
What do William Lowndes Yancey, Edmund Ruffin, and Geert Wilders have in common? Even though the first two owned black slaves in the 1800s and the last of that trio has spoken out against the spread of Islam across Europe in recent years, no - they're not all racists.
They're all secessionists. Or at least wannabe secessionists.
Yancey and Ruffin were known to be part of the "fire-eaters" who devoted themselves to Southern independence as the Northern states sought to undermine the Southern economy by eradicating slavery.
Wilders, who has vehemently opposed the "immigration of Islam" from Muslim countries into Europe, now looks ready to defend The Netherlands, and the North, on a different front ...
Over the weekend Wilders refused to engage Brussels in budget talks aimed at austerity. Now the EU faces a political commotion from The Netherlands as it tries to bring the region together and mitigate recession. Wilders has said he wants The Netherlands out of the euro and wants to bring back the Dutch guilder. He's tired of the constant patchwork responses from EU and Eurozone leaders.
Of course, this is just one guy who doesn't have the clout to really pull strings at any given moment; but he is loud enough and prominent enough to be heard and seen. And we know how much the status quo hates dissent, no matter where you are.
Yesterday, the ruling Netherlands government fell over disagreement about ongoing Eurozone austerity measures. Hmmm ... Timely for Mr. Wilders - he is putting the big question on the table: can the euro survive in its current form?
My view - it doesn't seem so.
Basic resolutions to the common currency conundrum seem to lie with either the need for 1) centralized fiscal policy in Brussels or 2) forced zone-wide austerity.
Naturally, trying to centralize government has plenty of drawbacks and is mostly an improbable solution. Zone-wide austerity, the chosen path for the time being, brings obvious drawbacks (e.g. immediately stunting economic "growth") as well.
Monetary policy, referendums, bailouts and summits have been hopeful stop-gaps to buy time and deflect the question that Mr. Wilders has put firmly on the table.
Will the euro be abandoned by any one country, much less by the entire zone?
Doubtful. Politicians are too self-important to effectively relinquish their power by choosing short-term pain (brought on by currency revaluation, etc.) in an effort to realize long-term gain. Short-term gain and long-term pain is the calling card of politicians everywhere.
What matters for investors is mood.
Discussions by officials on the viability of the common currency are not needed to undermine risk appetite and send the markets swooning. While investors have battled through the ebb and flow of PIIGS bailouts, Greek default, rising bond yields, firewalls, LTROs, ECB accommodation, bank insolvency, political rinse cycles, and recession ... they have not yet had to truly face real questions of the euro's future. Should that simple idea finally permeate investor mindset, markets could crater even if the common currency survives.
But might the fire-eaters be the death knell for Club Med?
Stranger things have happened, or so it's said. I think we're inching very close to the drumbeat ... as monetary cohesion within the zone is as unattainable as it's ever been.
From Ambrose Evans Pritchard:
Such thinking allows Berlin in particular to continue evading the uncomfortable truth that this mess is home-grown, stemming from massive trade and capital imbalances between North and South, compounded by the world's most leveraged banking system with loan-to-deposit ratios of 1.3 - the same as Japan at top of the Nikkei bubble. (America is a sober 0.7).
There is little point rehearsing the stale debate over whether Club Med states are to blame for living beyond their means, or whether Germany is as much to blame for beggar-thy-neighbour mercantilism, and for flooding the South with excess capital. Both played a role, and much else besides.
What is clear is that these imbalances have built up to such a degree that the Greco-Latin bloc is now trapped in debt-deflation - like victims of the 1930s Gold Standard - with wage costs out of kilter by 20pc or more.
Equally clear is that Germany cannot cling to a structural trade surplus with all southern Europe in perpetuity, at least on this scale. The system has to balance over time. Germany must either give up its intra-EMU surplus, or furnish offsetting funds through capital flows or fiscal transfers, if it wishes to preserve the euro. It is the complete refusal of Germany's governing class to face up to this dilemma that is now destroying monetary union. Firewalls are a decoy.
Ahh ... thank you, Mr. Pritchard, for that tidy summary of a train wreck in the making...
Remember that firewall idea? Sometimes people called it a "ringed fence." The IMF was quite self-congratulatory over the weekend on the commitments achieved for the fund. A happy face is always needed when you fall dismally short of your goal. And don't worry about those Americans and Canadians complaining about Europe (read wealthy Germany) doing more to shore up their own finances.
Why is the IMF so concerned? And why are Americans and Canadians concerned about throwing good money after bad?
The not-so-dirty little secret is that if Spain spirals out of control--evidenced by rising bond yields--and speculators attack Italian bonds, it is game over! Spain and Italy combined debt is estimated at about €4 trillion (that includes sovereign and external bank debt). There is not enough money to play defense.
For now, the EUR/USD cross remains supported; and technically could work higher. I think it is because of Eurozone bank deleveraging, increasing their demand for euro relative to currencies held globally. Deleveraging will slow and the tug-of-war between money flowing in and out of Europe will soon favor those running for cover.
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