How Difficult Will it be to Solve the Problems of the Eurozone?
Politics / Global Debt Crisis Oct 25, 2011 - 05:58 AM GMTBy: John_Mauldin
Do we need a law that makes it illegal to push a moose out of a moving aircraft? In baseball, what are the odds of a perfect game? How difficult will it be to solve the problems of the Eurozone? These and other issues are meditated upon by Grant Williams in his Things That Make You Go Hmmm… letter, which is this week’s Outside the Box. Maybe it was the baseball set-up (as my Rangers battle the Cardinals in the World Series) or that I keep getting asked about Europe here in New Orleans at the 2011 Oppenheimer Wealth Management Roundtable, but Grant really pulled me through his weekly missive when I got started, and I believe you will enjoy it as well. Long and short, Grant lays out the problems that we face in a very realistic assessment. I will also point out that he makes me look like a euro-optimist.
I am working on recovering from this past weekend, as this was the first time in 12 years I missed a letter due to simply not feeling well. But I guess that means I should be grateful I am not sick all that often. I hated to not write. The spirit was willing but the flesh was weak. It seems like I was “gifted” by my granddaughter with a nasty bug, which decided to show itself while I was in South Africa. Aaah, the joys of being a grandfather. Another round of catching nasty stuff from your progeny.
Your ready for some rest and baseball on TV analyst,
John Mauldin, Editor
Outside the Box
JohnMauldin@2000wave.com
Things That Make You Go Hmmm ...
“Everyone needs the ECB to step up to the plate. The ECB has no excuse not to act. In trying to keep its monetary virginity intact, the bank threatens to destroy the Euro Zone. If that happens, nobody will be able to profit from its virginity.” - PAUL DE GRAUWE
“Simple Math:
The total overall cap [of the ESM] is 500 billion Euros
160 billion Euros has been spent
340 billion Euros remains
340 billion Euros + zero Euros = 940 billion Euros“
- Mike Shedlock, on the latest European ‘Masterplan’ to merge the EFSF + ESM
“The trouble with quotes on the internet is that it’s difficult to determine whether or not they are genuine” - Abraham Lincoln
Lee Richmond, meet everybody. Everybody? Meet Lee Richmond.
It’s difficult to put an exact number on the number of games of professional baseball that have been played since 1900 - most estimates seem to be clustered around the high 300,000s though. For the purposes of this exercise, I am going to take the number provided in no-nonsense fashion by Wiki answers: 390,536.
In amongst those 390,536 games were home runs, walks, steals, strikeouts and singles, doubles and triples too numerous to keep track of; or rather, just too numerous for anyone but the most die-hard of stat geeks to even contemplate tallying.
(at this point, I should apologise to any non-baseball fans amongst you for whom the terms used above have induced a frantic bout of head-scratching and a desire to skip ahead – stick with me for a while longer and the fog will clear – I promise).
Part of the innate beauty of baseball to me is the fact that (certainly in the modern era), game by game, season by season every aspect of it is measured, quantified and evaluated and the myriad ways the numbers can be dissected enables you to drill down into any part of it and gain a real understanding, through those numbers, of exactly what is going on. You can't fudge the numbers. The Oakland Athletics' Billy Beane showed the power of this approach, which was documented so brilliantly in Michael Lewis' 'Moneyball'
But let's get back to Lee Richmond.
In 1880 Richmond became the first of only 20 men in baseball history to pitch a perfect game when he pitched the Worcester Ruby Legs to a 1-0 victory over the Cleveland Blues at the Worcester Agricultural Fairgrounds on June 12.
Think about that for a second.
Over 130 years. 390,536 games. 2 teams in each contest. That's 781,072 opportunities for a perfect game to be pitched or, to put it another way, the odds on a perfect game being pitched are 39,053:1 - and rising. In fact, more people have orbited the moon than have pitched a MLB perfect game and NOBODY has done it more than once.
(At this point I will again attempt to keep the non-baseball aficionados with us by the use of this short explanation of a 'perfect game':
A perfect game is defined by Major League Baseball as a game in which a pitcher (or combination of pitchers) pitches a victory that lasts a minimum of nine innings and in which no opposing player reaches base. Thus, the pitcher (or pitchers) cannot allow any hits, walks, hit batsmen, or any opposing player to reach base safely for any other reason - in short, "27 up, 27 down")
Interestingly enough, although it is technically possible for multiple pitchers to combine for a perfect game, to date, every major league perfect game has been thrown by a single pitcher.
That record needs to change. And fast.
Right now, the team comprising the ECB, EU and the various parliaments that make up that fractured and faltering alliance are sending pitcher after pitcher to the mound (sometimes in groups of two or three) trying to combine for the perfect game that they NEED in order to escape the debt trap they have backed themselves into.
Being in a situation where you lose unless you can pull something off against odds of multiple-thousands to one and pitch a 'perfect game' is a ridiculous spot in which to find yourself, but as this month has rolled by, it has become ever-more apparent that that is precisely where the Brussels Eurocrats now find themselves. It appears as though, as the pressure has ratcheted up this week, we are now in the ninth inning.
Personally, my own belief (as regular readers are by now well aware) is that the very best the Eurocrats can hope for is to extend the game by an inning or two, but their arms are tired, their bullpen is empty and, at some point, we are going to see an absolute avalanche of runs scored against them as the whole thing finally topples under its own weight.
This past week has been nothing short of farcical as the tension has built towards a crescendo that seemed at first to be willfully engendered in order to generate just enough sense of impending crisis to enable a resolution to be forced through in a similar fashion to that which preceded Henry Paulson and Ben Bernanke's now-infamous closed-doors fright-fest (hyphenation alert!) that led to the passing of the TARP in late 2008.
Obviously any and all capitulation towards outright bailouts (or 'QEU') must at least be seen to be against the will of the Germans and that proviso goes a long way towards explaining the raft of headlines that have flooded the Reuters and Bloomberg screens of investors all around the world this week. We have seen misdirection, scaremongering, u-turns and abject incompetence as well as the kinds of 'leaks' that are, frankly, laughable - the prime example being the 'leaked' draft copy of the Euro Summit statement which was printed, in its entirety, in the Daily Telegraph on Thursday - coincidentally at the precise moment when things were starting to come unglued as it became clear that this Sunday's Summit would NOT produce the magic bullet required.
The statement itself is priceless. It begins with a bit of back-slapping for the passing of the EFSF (after no less than six months of wrangling and an eleventh-hour drama in Slovakia):
The strategy we have put into place encompasses determined efforts to ensure fiscal consolidation as well as growth, support to countries in difficulty, and a strengthening of euro area governance. At our 21 July meeting we took a set of major decisions. The ratification by all 17 Member States of the euro area of the measures related to the EFSF significantly strengthen our capacity to react to the crisis.
The agreement on a strong legislative package within the EU structures on better economic governance represents another major achievement. The euro continues to rest on solid fundamentals
It then moves on to more familiar ground; an agreement to display their strong determination to fix things. Nothing concrete, of course, but they sure as hell are determined:
The crisis is, however, far from over, as shown by the volatility of sovereign and corporate debt markets. Further action is needed to restore confidence. That is why today we agree on additional measures reflecting our strong determination to do whatever is required to overcome the present difficulties.
The rest of the text, should you want to read it, is here, but allow me to summarise it through a few select phrases that will save you the trouble of doing so:
“blah, blah, blah… All Member States are determined, blah, blah, blah… We want to reiterate our determination, blah, blah, blah… We reaffirm clearly our unequivocal commitment that, blah, blah, blah… All other euro area Member States solemnly reaffirm their inflexible determination, blah, blah, blah… The euro area Heads of State or Government fully support this determination, blah, blah, blah… All tools available will be used in an effective way to ensure financial stability in the euro area, blah, blah, blah… We fully support the ECB, blah, blah, blah… “
See. I told you they were determined.
But, buried deep in the draft are (amazingly enough) some specific measures that will surely help solve the crisis:
• There will be regular Euro Summit meetings bringing together the Heads of State or government (HoSG) of the euro area and the President of the Commission. These meetings will take place at least twice a year
• The President of the Euro Summit will be designated by the HoSG of the euro area at the same time the European Council elects its President
• The President of the Euro summit will keep the non euro area Member States closely informed of the preparation and outcome of the Summits
• As is presently the case, the Eurogroup will ensure ever closer coordination of the economic policies and promoting financial stability.
• The President of the Euro Summit will be consulted on the Eurogroup work plan and may invite the President of the Eurogroup to convene a meeting of the Eurogroup, notably to prepare Euro Summits or to follow up on its orientations
• Work at the preparatory level will continue to be carried out by the Eurogroup Working Group(EWG)
• The EWG will be chaired by a full-time Brussels-based President. He/she should preferably also chair the Economic and Financial Committee
…and my personal favourite:
• Clear rules and mechanisms will be set up to improve communication and ensure more consistent messages.
It’s at this point that the non-Europeans amongst you are possibly finally beginning to get the joke that anybody caught in the tractor beam of ineptitude that is ‘Europe’ (and by‘Europe’ I mean the bureaucratic construct rather than the land mass) has understood for years.
THIS IS HOW EUROPEAN BUREAUCRACY WORKS, PEOPLE!!!!
Millions of Euros spent on days of‘talks’ to come up with solutions that fail to address any REAL problems.
Don’t believe me?
Article 47 of the Common Fisheries Policy will ensure that every fish caught by an angler is notified to Brussels so that it can be counted against that countries quota. If you go out for a days fishing and catch a couple of cod or mackerel you will now be required to notify the authorities or face a heavy fine.
There are EU regulations on the greenness of the person on the pedestrian crossing lights.
There are 3 separate EU directives on the loudness of lawnmowers.
Regulation (EC) 2257/94 - a great read, by the way - stated that bananas must be ‘free from malformation or abnormal curvature of the fingers’. It also contained stipulations about ‘the grade, i.e. the measurement, in millimetres, of the thickness of a transverse section of the fruit between the lateral faces and the middle, perpendicularly to the longitudinal axis’ ...
And then there are cucumbers:
Under regulation (EEC) No 1677/88 cucumbers are only allowed a bend of 10mm for every 10cm of length.
Do you think any of those were drawn up in 10 minutes on a single piece of paper?
No. (Actually, in fairness to Europe, they don’t have a monopoly on silly legislation: there IS a law in Alaska that makes it illegal to push a moose out of a moving aircraft.)
The Brussels bureaucracy has always been something of a laughing stock amongst the people of Europe - since long before the final creation of the EU, in fact. Way back in 1955, with a European union freshly on the drawing board ten years after the end of WWII, Russell Bretherton, an English Civil Servant was dispatched to Brussels to inform European ministers what Britain thought of plans for an ambitious new European treaty. Upon arrival, he had these words of wisdom for those assembled:
“Gentlemen, you’re trying to negotiate something you will never be able to negotiate. If negotiated, it will not be ratified. And if ratified, it will not work”
Three years later, the Treaty of Rome was signed, establishing the European Economic Community and from that day to this, the degree of meddling, interference and sheer bureaucracy has increased year after year until we find ourselves here.
Europe is broken and the people charged with trying to fix it are clearly not up to the job. There are way too many vested interests, too many national peccadillos and way too many good, old-fashioned egos in play for it to come down to anything but a last-ditch solution when they are forced into it - and that solution WILL be the printing of money in some shape or form which will help to magically inflate the debt away. The other alternatives are either just too painful (default/ forgiveness) or plain unworkable (growth).
A look at a selection of newsflashes that hit screens this week shows just how ridiculous things have become as everybody involved in trying to sort out the mess that is Europe attempts to get themselves in front of a microphone in order to let the world know just how important they are. Some of these appearances, it would seem, are stage-managed for maximum effect on markets - others are simply self-important politicians who just can’t bring themselves to utter the words “no comment”:
*GERMAN COALITION SOURCES: MERKEL SAYS LEVERAGING EFSF VIA ECB IS RULED OUT
*MERKEL TOLD LAWMAKERS MOVING FORWARD MILLIMETER BY MILLIMETER
*ECB TRICHET: CAN’T USE MONPOL TO CORRECT FAILURES OF GOVERNMENTS
*ECB NEVER ACTS AS A SUBSTITUTE FOR GOVERNMENTS: NEWSPAPER INTERVIEW
*FINANCIAL STABILITY IS THE RESPONSIBILITY OF GOVERNMENTS
*EMU HAS PRICE STABILITY TODAY; INFLATION EXPECTATIONS FIRMLY ANCHORED
*TRICHET REJECTS ASSERTION THAT ECB HAS OVERSTEPPED ITS LIMITS
*TRICHET: EURO WILL EXIST IN 10 YEARS
*SEIBERT SAYS `DREAMS’ OF SWIFT EURO SOLUTION WON’T MATERIALIZE
*GERMAN COALITION SOURCES: MERKEL SAYS LEVERAGING EFSF VIA ECB IS RULED OUT
*DJN-DJ REPORT EFSF FIREPOWER TO REACH EUR2T ‘TOTALLY WRONG’-SOURCE
*MERKEL SAYS NEXT EU SUMMIT IS `NOT THE END POINT’ FOR CRISIS
*DJ GERMAN GOVERNMENT DOESN’T EXCLUDE DELAYING OCT. 23 SUMMIT
*MERKEL CANCELS FRIDAY SUMMIT ON LACK OF EFSF DETAILS
*MERKEL CANCELS EFSF SPEECH ON DEADLOCK ON LEVERAGING: LAWMAKERS
*FRANCE, GERMANY SEE NEED FOR GLOBAL, AMBITIOUS CRISIS RESPONSE
And the piece de resistance:
*MERKEL SAYS EUROZONE TALKS STUCK. FLIES TO FRANCE: REUTERS
*SARKOZY SAYS EUROZONE TALKS STUCK, FLIES TO GERMANY: REUTERS
Amidst this barrage of headlines, Nicolas Sarkozy was quoted in two articles which outlined his own fears for Europe:
“Allowing the destruction of the euro is to take the risk of the destruction of Europe. Those who destroy Europe and the euro will bear responsibility for resurgence of conflict and division on our continent.”
And...
“If there isn’t a solution by Sunday, everything is going to collapse”
There’s something eerily familiar about that last sentence. Let’s see what Google Translate makes of the original French version, shall we?:
“If money isn’t loosened up, this sucker could go down”
Those words were uttered by another President on September 26, 2008 - a few days before TARP was passed into law.
No matter how long this charade continues, it seems impossible to see how it doesn’t end in a EuroTARP. The ECB have a brand new, never-been-used printing press just sitting there in a locked room waiting to be called into action. The only problem is; the Germans have the key to the door. How long they continue to try to do the ‘right’ thing before capitulating is pretty much the only unknown quantity right now.
Having backed themselves into a hopeless corner early last week with promises of a ‘solution’ come the end of this weekend’s summit, the Eurocrats have now postponed the decision until next Wednesday. On hearing this, the markets were eerily calm, as the UK Guardian noted:
(UK Guardian): Investors’ thinking seems to be that the adoption of a new deadline - “Wednesday, at the latest,” according to last night’s communiqué - could be construed as good news, or at least neutral from the point of view of share prices and bond prices. This theory says that more time to reach agreement makes a watertight plan more likely to happen.
Really? The notion sounds like a triumph of hope over experience. Okay, last night’s statement still promised “a global, ambitious response to the crisis currently facing the Eurozone” but it seems just as likely that more time will simply entrench disagreements between Germany and France. As the clock ticks, the definition of “ambitious” could simply be watered down..
But is this sense of calm justified? Well, in a word, no.
Overnight, the latest leaks out of the ongoing Crisis Summit paint an ugly picture about what happens next and, if the leaks are anything to go by, we are in for anything BUT a period of calm:
(UK Daily Telegraph): Europe’s leaders are threatening to trigger a formal default on Greek debt and risk a “credit event” if banks refuse to accept losses of up to €140bn (£120bn) on their holdings.
Hardline eurozone members, backed by the International Monetary Fund (IMF), delivered the ultimatum this weekend after an official report found that in a worst-case scenario Greece could need a second bail-out of€450bn – twice the current package and more than the entire €440bn in the eurozone’s rescue fund.
Vittorio Grilli, a senior EU official, travelled to Rome yesterday to present the “take it or leave it” deal to the Institute of International Finance, which is leading the negotiations for the banks. “The only voluntary element for the banks now is to take a 50pc haircut or face a credit event, a default,” said an EU diplomat.
Apparently, even a once-taboo idea of a centralized Treasury is also now on the table:
(UK Daily Telegraph): European Union chiefs are drawing up plans for a single “Treasury” to oversee tax and spending across the 17 eurozone nations.
The proposal, put forward by Herman Van Rompuy, the European Council president, would be the clearest sign yet of a new “United States of Europe” — with Britain left on the sidelines.
The plan comes as European governments desperately trying to save the euro from collapse last night faced a new bombshell, with sources at the International Monetary Fund saying it would not pay for a second Greek bail-out..
Or how about an EFSF SPV that will attract money from our old friends the Sovereign Wealth Funds (surely, by now, even THEY are starting to understand the folly of investing in these things?):
(UK Guardian): Finance ministers from the 17 eurozone countries are discussing the option of creating a “special purpose vehicle” for the European Financial Stability Facility (EFSF) in order to boost its current€440bn (£383bn) lending capacity.
The idea, according to sources, would be to attract further money from official and private investors, with the sovereign wealth funds of countries such as China, Singapore or Qatar a prime target. Some of these already invest in European banks such as Barclays and UBS.
So here we are.
It’s Sunday morning in Asia as I finish writing this week’s missive and the messages coming out of Europe are as mixed as ever, despite the clear need for a ‘solution’ (which has been perhaps the only consistent communique for about two years now). Sadly for the Eurocrats, the time when they have to stop telling us how important a ‘solution’ IS and actually devise one that WORKS is now at hand.
Any more prevaricating and the markets will give them their solution whether they like it or not.
The chances are that we will see another photo-op featuring the region’s finance ministers this week as they unveil their latest ‘plan’ that will fix everything. There will be a communique issued which lays out exactly how determined they are to solve everything and quantifies all the important steps they have so far taken as well as the improvements they are seeing in the finances of the PIIGS. There may be some criticism of the banks for forcing them to this point, and there will most likely be certain promises made about how they aim to extract retribution for their forced largesse, but they will take one more swing at a solution - one that stops short of the massive steps they need to take to shore things up once and for all.
Then the markets will have their say.
Ultimately, the only realistic way to fix Europe’s problems is to shovel money into the gaping hole that is the region’s finances. Which means that the REAL question that has to be answered is fairly simple:
Where is that money going to come from?
Growth? Nope.
Inflation? Not quickly enough.
Forgiveness or default? Not if you don’t want M. Sarkozy’s prediction coming true.
The ECB’s printing press? Only if you can change German minds.
Until German minds are harder to change than the immutable laws of mathematics, I suspect we have our answer.
Only one Perfect Game has been thrown in a World Series game - when it REALLY counted. The year was 1956, the pitcher that day was Don Larsen and, as the 27th opposing batter was finally struck out, Larsen leapt into the arms of a man whose words of wisdom have graced the cover of Things That Make You Go Hmmm..... on several occasions: Yogi Berra.
The latest European Crisis Summit? Well, as Yogi would probably have said, it’s déja-vu all over again.
∞∞∞∞∞∞∞
So what do we have for you this week? Well, naturally, there’s a whole lotta Europe including warnings of a French downgrade from top economists, warnings of a ‘downgrade blitz’ across the EMU from S&P and a warning for Mario Draghi as he prepares to take the crown from Jean-Claude Trichet’s greying head in a little over a week.
Morgan Stanley explain Europe’s‘Triangle of Terror’, we hear how the EU is mulling over a $1.3 trillion fund and little Belarus is doing its bit to show that austerity is the way forward by heading to eBay.
Amidst Boston’s own ‘Occupation’ we find some of the most delicious irony of the year, the next wave of mortgage-backed lawsuits is set to traumatize Wall Street yet again, Peter Tchir imagines the EFSF as a hedge fund and we investigate the mysterious China International Fund and its activities in Africa.
Gillian Tett examines the possibility that there is a ‘shadowy plot’ behind gold, we look at common equity to total asset ratios that are downright scary, examine Libya’s population pyramid and examine the implications for other Arab nations and see how the cost of oil extraction and the yields on Italian government debt are both heading in the same direction.
Finally, we put the price of gold in Weimar Republic Marks in stark perspective and hear from Rick Santelli, Doug Casey and Paul Brodsky who all have something important to say and do a damn fine job of saying it.
That’s all for me for another week.
Play Ball!
By John F. Mauldin
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