It feels like we are finally at the moment of decision in the Euro Crisis. Italy and Spain have to inject money into their banks beginning now. The urgency is here because they have to borrow to do it. But Italy and Spain have limited or no ability to borrow anymore. Spain's bonds are being bought by their own banks, who are in turn being fed capital by the European Central Bank. But Spain's banks have now been revealed to be largely insolvent. The charade that Europe is solvent has been outed this month in Madrid.
To regain their solvency, it is being said Italy and Spain require 1.8 trillion Euros of capital. 1.8 trillion Euros of whose money? Germany doesn't have that much money but it could borrow that much. Some say Germany must or should bailout bankrupt Europe. It is in Germany's interest to prop up the Euro despite the cost they argue. The consequence of a collapse in the Euro will devastate Germany's economy as well as bankrupt Spain and Italy. Some say it will even lead to war. Certainly, Europe's leaders want to save the Euro but can they?
Politically Will They? Can They?
The electorate in AA rated Europe, Germany, Finland, the Netherlands and Austria don't have a good feeling about taking on the liabilities of bankrupt Europe. At last weekend's heavily watched Euro Cup football match between Greece and Germany, German viewers witnessed Greek fans chanting, "We won't pay you back!". Greece has repeatedly made promises in exchange for bailouts since 2010 that they have broken. It is likely Germans, the Dutch, Austrians and Finns don't believe they ever will be paid back by either Greece, Spain or Italy or that the those borrowers will change their ways and it makes them angry.
It seems doubtful angry voters in AA Europe will vote yes to assume the now staggering debts of junk debt Europe. Yes Germany and the rest want to fix the Euro crisis, but in terms of their own domestic politics, it doesn't seem realistic. Politically Europe cannot finance a fix to the crisis.
Legally Will They? Can They?
For Germany at least, bailing out junk Europe without receiving billions in collateral would be unconstitutional. The 1949 constitution was designed to prevent a repeat of the monetary mistakes that set the stage for the Nazi period. The famous collapse of Germany's currency in 1923 where hyper inflation increased costs to incredible prices such that a loaf of bread came to cost 100 billion Marks set the stage for political extremists to seize power. Germany's constitution prohibits policies that would damage the currency. Borrowing 1.8 trillion Euros to bailout two foreign countries is not only repugnant in Germany but unconstitutional.
The Euro crisis fix is moving towards a scenario where Germany shall guarantee the debts of junk Europe if it can rely on a credible European government to control the budgets of these countries. This loss of sovereignty is actually two way unfortunately. In exchange for backing junk Europe, all parties have to surrender sovereignty to the new European government. No good deed shall go unpunished it is sometimes said and here for Germany this is definitely the case. But is surrender of fiscal sovereignty to a now dominated European government constitutional in Germany or anywhere for that matter?
And desperate though they are now, is it legal in Italy to surrender sovereignty to a German controlled Europe for a bailout? Italian law very well may bend to suit circumstances, but law based on thousands of years of tradition and culture, Italian common law which is their real guiding force if you will, forbids it. Italy was unified in 1871, yet Sicily today still is an outlier from Italian consensus, law and the Italian economy. Agreements countries make with Europe today in exchange for bailouts, mean little to nothing down the road when the agreements become inconvenient.
Legally, Germany's constitution blocks Europe's bailout. But if junk bond Europe sells their sovereignty for bailouts, are those going to be enforceable contracts down the road? Realistically no. Legally, whether it is because of Germany's constitution or the weakness of law in Southern Europe, the Euro crisis bailout cannot happen.
Practically Should They? Can They?
Until now, Europeans thought the Euro was a wonder. It achieved the political goal of breaching the borders ensuring peace and seemingly unleashing new productivity and prosperity. Over the past five years or so the financial malaise that has drifted over Europe has lead to big stagnation in the Mediterranean countries. 25% unemployment in Spain is evidence of an economy that is uncompetitive and the Euro has something to do with it.
The Euro is an expensive currency for the Spanish economy to do business in. Spanish manufactured and agricultural goods can't compete with Asian goods on price versus quality. They are too expensive. Spanish goods can't compete with German goods on the higher end. German goods are better and since both have the same currency and similar cost structure, Spanish goods can't compete with German productivity and quality. Spain is being squeezed in the middle and under the current Euro zone arrangement has no way out going forward.
Conversely, the Euro is a less expensive currency for Germany to do business in. If there still was a Deutsche Mark, it would be more expensive than the Euro. The Euro helps Germany conquer markets in Europe's and the world. Unemployment in Germany is half to a quarter what it is in Latin Europe. While Germany thrives under the current Euro status quo, the erosion of the Italian and Spanish economic base is ongoing and intractable.
Finally, this crisis is too big to bail. It is already obvious when you think of it, but when France, whose unemployment is now at a 12 year high, gets closer to their default it will be obvious. 1.8 trillion Euros to bailout Spain and Italy is more than is possible already. But when you add in the rest, the impossibility of it all is overwhelming.
Practically, the benefits of Euro membership were very up front for much of Europe. In the Euro, Latin Europe could borrow cheaply and they did massively. The borrowing created a false and temporary prosperity. Now the debts and loss of competitiveness weigh mercilessly on these countries. Pratically speaking, the Euro crisis is unlikely to be resolved with bailouts or to go on as it is constituted now. It just isn't practical.
