There is a sense that the situation at hand is fragile, and that further volatility will set in motion a chain of events that will lead us to a dark, unpalatable era of conflict. That’s scary. There is also a sense that this situation, this system, The Way Things Are™, is such a farcical representation of reality that it’d be better to just let it burn and create something from the green shoots sure to sprout from the ashes. That’s insane.
I’m inclined by nature to fret about hypothetical situations, as I live inside my mind far too much to be anything but a Negative Nancy (a pessimistic Percy?) The problems, however, are all too real to be dismissed as the usual self-distracting paranoia.
The situation is as follows: Greece, after a week of political farce (farcical even by Greek standards), finally has a new Prime Minister. Unfortunately, Greece is going to default on its debt in the form of a bond-holder ‘haircut’. Italy, a bastion of political subterfuge and incompetence even in the best of times, will likely have a new PM as well. They, too, have no feasible way of paying back its sovereign debt and is now essentially a ward of the IMF. French banks, companies like Société Génerale and Crédit Agricole and BNP Paribas, are going to lose billions to the Greek fiasco, and potentially could lose billions more (along with banks from every part of the world) if the Italian bond market implodes further. There are other nations in Europe with junk-status bond ratings, most notably Portugal, a nation which will almost certainly follow the Greek path to perdition in the months to come.
Ireland and Spain are in critical danger as well, but that’s relatively immaterial at the moment as the entire European project–the Euro, the EU, Schengen, Maastricht–could implode if a solution to the cavalcade of problems is not found post haste. At the moment, the chances of a grand solution are at best an even-odds proposition (50/50 if you will). It is important for all of us, whether in Europe, in the US, Asia, or elsewhere, to take stock and note this basic truth: this is a political crisis revolving around a financial problem.
Political and economic commentators alike often lose sight of this particular point when looking at CDS spreads or Italian 10-year bond yields, with good reason. There is so much that is fucked, financially speaking, that politics seems to be a distracting sideshow from the issues that matter. Unfortunately, this is akin to mistaking the image in the mirror for the Real McCoy: this situation–lack of regulations, massive deficit spending, ad hoc financial rules arbitrarily created and withdrawn at the whim of a central banker’s fancy, and persistently high unemployment–has been a political problem from the start. Elected officials in Europe and the United States, and unelected officials in the EU high command and (to a lesser extent) in the Chinese Communist Party have created this crisis through a combination of indecision, woeful middle-term planning, and a high-handed approach to statecraft that has exacerbated tensions at the exact time that cooperation and joint policy-making is most needed.
No one knows (one can guess, but it is just that, a guess) as to how much leverage trading desks at major financial firms used to take positions on sovereign CDS or bonds. If it’s 10:1, then there will be a blood-letting–but it will manageable, and business will limp along. If it was more like 40:1 or the sorts of ratios we saw hedge funds at large financial institutions like AIG and Lehman Bros. take in the run-up to the last crisis, then all bets are off.
I am by no means an expert on finance. I did, however, spend money I don’t have (doh!) to pass intelligent judgment on the political situation at hand. In Europe, the European Union has acquired and wielded an enormous amount of influence over the political and economic affairs of its member states and the states that are in the immediate periphery of the EU. The adoption of the common currency, the Euro, accelerated this process, though it began as early as the late 1960s. As such, the ability of individual member states and the citizens that they purport to represent to influence policy was limited to begin with and has steadily eroded over time.
Power seeks additional power, and the ‘European Project’ has grown into an enormously influential but highly bureaucratic and dogmatic institution hostile to democratic means of expression. This ‘democratic deficit’ is most evident in the adoption and implementation of joint economic policy (the original raison d’etre for the EU’s predecessor, the European Economic Community). A common currency was created and adopted in nations with widely divergent GDP’s, per capita incomes, and levels of economic development. There were political restraints on who was allowed to adopt the Euro when within the Maastricht treaty, but these were widely ignored as a matter of political convenience.
Although the European Parliament now wields significant power, it remains an institution that shares its ability to shape policy with an unelected body–the European Council of States–and remains subject to the leanings of the various national governments represented within its purview. The EU, then, is fundamentally a top-down creation. To make a terrible analogy, it is akin to a skyscraper built from the top-down: feasible, yes, but entirely silly and downright dangerous. The ground underneath the foundation of this structural abomination is liquefying and sliding downhill from the flood of economic crises it has faced since 2007. It will likely hold, as there are generational legacies on the line and it seems that bureaucratic functionaries are stepping into the vacated PM posts. Such technocratic governments will make it easier to find a way forward. Even with political and economic interests brought belatedly into alignment, however, there is a great question as to whether building this was a good idea in the first place.