Euro Group: Going Nowhere Fast

Yesterday we opined on the euro-group summit as follows:


Prediction: absolutely nothing of substance will emerge from the summit, as always.


OK, we admit that as predictions go, that one was really easy. It was not necessary to  gaze into a crystal ball, throw bones or study the innards of dead animals to make it.

First off, the 'euro bonds' idea. We noted yesterday that this wasn't going to happen, which incidentally is a good thing. As it turns out, it isn't going to happen. The WSJ reports:


„A drum beat of recent calls for some form of euro-zone debt issuance ran into a phalanx of opposition at a European Union summit Wednesday, with a number of leaders saying the idea was premature or counterproductive.

The election of French President Francois Hollande has shifted the debate within Europe to what measures can be taken to boost growth. Hollande pledged to raise the idea of euro-zone bonds–common securities issued by a group of euro-area countries–at Wednesday's summit.

The European Commission and the European Parliament have also said now is the time for a road map for advancing with the proposal, while the likes of Belgium, Italy and Greece have continued to speak in favor.

The recent momentum behind the initiative had led to speculation that Germany could emerge isolated from Wednesday's summit, standing in the way of radical ideas to exit the crisis.

That would have been all the more galling on a day when Germany issued around EUR5 billion of debt at close to zero interest rates while other euro-zone governments face borrowing costs north of 6%.

On her way into the meeting, German Chancellor Angela Merkel stood firm in her opposition to the idea.  She said the EU's founding treaties "forbid" the "taking on of joint liability" of debt "and according to our opinion that also includes euro bonds."

"In addition, I believe that they do not contribute to growth in the euro zone, because the very similar interest rates that we had for many years led to very grave misguided developments," she told reporters.

Yet Merkel didn't stand alone. Caretaker Dutch Prime Minister Mark Rutte also slammed the talk of euro-zone bonds. Such securities "do not lead to growth, they lead to our [interest] rates rising. It's not the solution to our problems."

French President Francois Hollande was "free" to raise the issue, he said, but growth would only flow from fiscal discipline and economic reforms.

Finnish Prime Minister Jyrki Katainen said euro-zone bonds wouldn't have helped the region cope with the crisis. Instead, he said, they could institutionalize excessive borrowing.

"Countries must be responsible for their own debt," he said. Were the idea ever to find support, it would take "a long, long time to launch" them.“


The short version again: it's not going to happen, because it is not legally possible (of course that pesky little detail hasn't kept the eurocrats from doing certain things before, but we doubt the German government will defy its own supreme court on the issue). It's not even worth discussing at this stage.

Greece was also a topic of course and while the consensus is that it won't leave the euro area, preparations are underway for the day it does leave. Otherwise there was a surfeit of empty platitudes of the sort we have come to expect from these summits. Via the AP the following summary was published:





Luxembourg Prime Minister and president of the group of finance ministers of the 17 euro countries, Jean-Claude Juncker told reporters at the end of a summit of European leaders in Brussels that the eurozone countries `'have to consider all kinds of events" but insisted that `'the working assumption" was that Greece would remain part of the euro.

Juncker's statement was a frank admission that Greece could wind up abandoning the euro as its currency _ a prospect many analysts fear could cause investors to doubt the financial viability of other weak members of the eurozone.

However, Juncker insisted early Thursday, at the end of a summit of EU leaders, that he had not asked the euro nations to prepare national contingency plans for a possible chaotic departure of Greece from the currency.

Steven Vanackere, Belgian Finance minister added: "To say that we do not prepare eventualities would not be a responsible attitude.

"I believe many counttries have contingency plans when it comes to things they want to avoid at all cost, like a terror attack. And to say that we have no contingency plans, would be irresponsible."

At the end of a summit dinner of the 27 European Union nations, EU President Herman Van Rompuy said that all EU leaders want Greece to remain in the eurozone while respecting its commitments to pay back its debt. Van Rompuy said the EU needed to concentrate more on coordinating its policies to promote economic growth, to step up investments and credit to small and medium-sized businesses, and to focus on job creation.

French President Francois Hollande said EU funds could be dispersed quickly on projects that could help create jobs.


OK, apart from 'dispersing EU funds quickly' (isn't that what always happens to EU funds anyway?), how exactly is economic growth to be promoted, how are investments and credit to small businesses to be stepped up, and what kind of 'focus' will lead to job creation?

Rompuy merely recited a wish list, as though politicians and bureaucrats were actually the driving force that 'promotes economic growth' and 'creates jobs'. As to Hollande, it is no use wishing for something that is happening anyway. Nothing on this planet is 'dispersed' faster than the loot they take in from the tax cows.

We have all heard Rompuy's wish list before – a thousand times in fact. Now, should someone from the eurocracy stumble over this blog, here are a few tips:

Politicians and bureaucrats create neither economic growth nor jobs. The only positive thing they can do, apart from resigning on the spot, consists of getting  out of the way. Chuck the myriad regulations that are stifling the entrepreneurial spirit in Europe; cut fiscal spending so that the State shrinks back to a far smaller percentage of economic activity than it represents today; cut taxes. Cut down on your own numbers, generously

While you're at it, think over the current monetary system and its countless flaws. It would be best to throw it out of the window and start from scratch, with a free banking system based on sound money and the strict enforcement of property rights (no more money from thin air, so that two or more different people no longer end up having claims on the same original deposit; this has been regarded as a fraudulent practice in Europe since antiquity, and although it has been legalized, it still is a fraudulent practice).

It is really simple. One needs neither euro-bonds for this, nor 'tax harmonization' or any of the other gimmicks the centralizers and socialist super-state builders dream about, nor should it matter whether everybody uses the same medium of exchange or not. Of course the gravy train in Brussels and bureaucratic centers elsewhere would end up considerably diminished.

This last sentence is why none of the above is likely to happen anytime soon. Still, we should probably be glad if nothing actually comes out of the summit. One must always fear the worst when they actually do make decisions on something. As the title of this article suggests, the main reason to travel to these summits is probably the undoubtedly high quality of the catering.



This is why it's called a shrimp fest.

(Photo source unknown)



Rumors and Blind Faith

European stock markets and the euro cratered as the summit got underway. Market participants evidently rightly suspected that nothing earth-shattering would come out of the meeting of the squabblers.

The Euro-Stoxx 50 index depicted below masks the fact that the peripheral markets saw much bigger declines, such as a near 3.7% decline in Italy's MIB and a 3.3% decline in Spain's IBEX to a new closing low.

Initially the wave of selling also engulfed the US stock market, with the DJIA at one point down almost 200 points. Gold was also hammered, as the robots sold it in view of the declining euro.



The Eurostoxx 50 Index sells off sharply on summit day – click chart for better resolution.



As the US trading session went on, some strange things started happening. With gold closing in on a retest of its recent lows, gold stocks suddenly started to rally, like a scene from night of the living dead. Aren't they supposed to only go down? Apparently not. Then gold followed them higher and retraced a good portion of the earlier selling.

Finally, the stock market recovered its entire loss and actually ended slightly in positive territory when the closing bell rang. Regarding the 'reasons' given for this, we want to quote the financial press:


“U.S. stocks erased losses amid optimism European leaders will do more to halt contagion from the region's debt crisis.”


Say what? Did everybody eat their stupid pills in the morning? They can't be serious, can they? In the course of the day there were various rumors making the rounds, ranging from fantasies about euro bonds to an alleged 'verbal agreement' by Mrs. Merkel to institute a supra-national pan-European deposit guarantee scheme in order to stem the various actual and potential bank runs.

As we noted to a friend, there are only two possibilities here: either the market was oversold enough that it would have used any rumor or news item as an 'excuse' to rally (this we deemed more likely), or the people doing the buying were complete morons because they actually thought these rumors and 'hopes' were a good reason to buy stocks. In the latter case, we expressed the conviction that they would soon be weeded out. 

Judging from a few more quotes from the press report linked above we're no longer so sure what is really more likely (just kidding: the market doesn't need a 'reason' to move up or down; anyone basing his trading decisions on news headlines is beyond help). Still, consider the following:


“Huge turnaround," said Tim Ghriskey, who oversees about $2 billion as chief investment officer of Solaris Group in Bedford Hills, New York. "There's speculation that European leaders will take action to stabilize the situation with Greece. In addition, there's a lot of cash on the sidelines looking to get into the equity market. Certainly the decline we've had recently might provide an opportunity."


OK, maybe there really is an opportunity to buy overpriced stocks here in the hope of unloading them later at a higher price on a bunch of greater fools. In fact, in the short term the market did strike us as somewhat oversold as we recently mentioned. Where does this strident belief in the 'money on the sidelines' myth come from though?

To make sure everyone's on the same page with us here we will repeat how this works: money never flows 'out of' or 'into' stocks. Stocks are not vessels alternately filled with dough or air.  If someone who holds money buys stocks, then he ends up holding stocks while the seller of the stocks ends up holding his money. The amount of 'money on the sidelines' – ta-da!!! – remains exactly the same as before.

What constantly changes are merely the prices at which assets are exchanged. The general desire to hold money/cash balances as opposed to investment assets such as stocks will often change, and that will be reflected in prices. It is moreover true that the amount of 'money on the sidelines' constantly increases as long as the Fed continues to inflate the money supply. The speed at which it accomplishes this feat often influences the desire to hold certain assets instead of cash balances. However, upon thinking this through properly, one will realize that the amount of 'money on the sidelines' was at a record high both prior to every rally and prior to every crash we have experienced over the past few decades. The fact of constant money supply growth is therefore not per se a good argument for higher stock prices in the near to medium term (whereas it cannot be denied that there is a 'long term upward skew' to nominal prices because of it).

We're actually not quite sure what is worse: believing the money on the sidelines myth, or the idea that a euro-group summit will end up 'stabilizing' anything, let alone Greece! If we had conducted this interview, it would probably have been rather difficult to keep a straight face.



After taking a deep toke from the hopium pipe, traders 'buy the dip' and the SPX recovers from a steep intraday loss to end in positive territory – click chart for better resolution.



Unlikely Allies of Germany

Finally, the German daily 'Die Welt' had a few interesting remarks on how Portugal and Ireland are viewing the evolving situation in Greece. They are not amused and are staunchly opposed to easing the terms of the bailout program for Greece. If Alexis Tsipras were to succeed in blackmailing the EU to give in, then all the hard work and belt tightening accomplished in Ireland and Portugal to date would suddenly look quite foolish.

An excerpt:


“Irlands Finanzminister Michael Noonan und sein portugiesischer Kollege Vítor Gaspar zwangen den griechischen Kollegen in den Schwitzkasten: "Ihr verderbt die Sache für uns alle", ließen sie ihn beim jüngsten Finanzministertreffen wissen. "Wir tun alles, um die Programme umzusetzen. Tut ihr das nicht, müssen wir dafür zahlen", redeten sie auf EU-Botschafter Theodoros Sotiropoulos ein, wie portugiesische Medien berichteten.

Die Angst ist riesig, dass die Griechen die ebenfalls unter Troika-Aufsicht stehenden Portugiesen und Iren mit sich reißen. Beim Sondergipfel der Staats- und Regierungschefs am Mittwochabend in Brüssel konnte Bundeskanzlerin Angela Merkel daher auf zwei Verbündete zählen, die von Athen verlangen, Wort zu halten: auf Enda Kenny, den irischen Regierungschef, und den portugiesischen Premierminister Pedro Passos Coelho.


Ireland's finance minister Micheal Noonan and his Portuguese colleague Vitor Gaspar grabbed their colleague from Greece in a headlock: “You're ruining the whole thing for all of us”, they let him know at the latest meeting of finance ministers. “We do everything to implement the programs: If you don't, all of us will pay for it”, they told EU ambassador  Theodoros Sotiropoulos as Portuguese media reported.

The fear is great that the Greeks will take the Portuguese and Irish that are also  under the supervision of the 'troika' with them.  At the special summit of the heads of state and governments on Wednesday evening in Brussels, chancellor Angela Merkel was therefore able to count on two allies who demand that Athens keep its word: Enda Kenny the Taoiseach of Ireland and the Portuguese prime minister Passos Coelho.”


It is noteworthy in this context that Spain's prime minister Mariano Rajoy, after speaking with French president Hollande, emerged with exactly the same message: things are tough for the Greeks, but there is no alternative (with the unspoken qualification: 'if they want to remain in the euro area').



Juncker, Noonan and Gaspar.  Noonan looks like he is about to kill someone.

(Photo via Reuters)




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5 Responses to “So Long Comrades, and Thanks for all the Shrimp”

  • amun1:

    “Politicians and bureaucrats create neither economic growth nor jobs. The only positive thing they can do, apart from resigning on the spot, consists of getting out of the way.”

    I wish it was that easy. It’s not just the bureaucrats who are obstructing economic growth, it’s all the rest of us too. We’ve been brainwashed by 80 years of constant propaganda on the virtues of central planning and socialism. If the entire eurocracy resigned on the spot, there’s little doubt that the people of Europe would immediately elect an identical set of central planners with big promises for growth and prosperity via the guidance and funding of the state.

    Maybe there’s a fundamental flaw in human nature that prefers the security of repression to the uncertainty of freedom? Every few generations that impulse reaches its inevitable consequence, and we start from scratch with a new perspective. It seems that hour has come round at last, and the rough beast is once again slouching towards Bethlehem.

    • ManAboutDallas:

      “Maybe there’s a fundamental flaw in human nature that prefers the security of repression to the uncertainty of freedom?”

      BINGO ! ( actually, amun1, there are Seven of them, but any single one of them is enough to sink the ship, once the cannon with its name on it starts rolling around on the deck. )

    • Andrew Judd:

      When you talk about freedom you must presumably be talking about the freedom provided by a knife or a gun or your fists to carve your own empire without worrying about the rule of law?

      Otherwise, what actually do you have in mind when you talk about freedom?

      • amun1:

        When I talk about freedom, I’m talking about the freedom to conduct one’s day to day business without state intervention. I’m talking about allowing consenting adults to make economic decisions with full responsibility for the outcome, good or bad. I’m talking about freedom from redistribution of assets by the state, either from rick to poor or vice versa.

        Your question is one that I’ve frequently heard, pitting the relative comfort of modern statism against the violence of anarchy. It’s posed as an either/or proposition. Actually, there is a middle ground as laid out by the US constitution; a framework for a spare government that provides for national defense, personal protection, and individual rights to life, liberty and the pursuit of happiness. But we chose to broaden those rights, to include social security, healthcare, housing, minimum wage, collective bargaining, etc., etc., etc., etc. In exchange for those broad promises, that protection from failure, we’ve given up freedoms, including financial freedoms. We’ve severely damaged the personal incentives that make an economy function efficiently. And we’ve made government so large that it can be corrupted to control the entire economy, for the gain of a very wealthy few. Power corrupts, absolute power corrupts absolutely.

        History is a good guide for what happens when people submit their freedoms to the state in exchange for promises of stability and security and fairness. They get neither freedom nor security nor stability nor fairness. Nor do they get prosperity for the masses, which is the most alluring promise. Hayek accurately identified socialism as a transitional state on the road to serfdom. That’s a lesson that we’ve yet to learn.

        • worldend666:

          Excellent reply Amun

          I think the optimal role of the state can be reduced to just one: Enforcement of property rights.

          National defence and personal protection and so on are all encompassed by this. If the government just did this one thing taxes would be minuscule and the economy would take care of itself. All people would accept their responsibility so save for their own “golden” years and through necessity, local cantons staffed by volunteers would take care of local matters like town planning.

          This solution is no utopia but it’s the best available.

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