2012-03-04

Nationalizing the European debt crisis: let's start talking about the EU breakup

The predictions of an euro breakup are widely found these days, but one still meets stiff resistance to the idea of an EU breakup. According to socionomics though, negative social mood will potentially lead to the breakup of the political union. One big step moving in that direction is financial nationalization of the sovereign debt crisis. In John Mauldin's letter this week, he notes that Greece was bailed out because the European banking system was filled with Greek debt. If Greece defaulted, German and French banks would go bankrupt and require billions in bailouts. Setting aside whether the Greek bailout will eventually work or not (it won't), consider what is happening to the sovereign debt of other nations:
Europe will then demand even more cuts when the targets are not reached (or increases in taxes on what's left of the private sector). Everyone realizes the party is over, but no one wants to be the first to leave. It simply will not do for the eurozone to expel a member. The precedent is dangerous. So they make staying in the eurozone so onerous that leaving eventually becomes the best choice (more on that later). "We didn't tell force you to leave; it was your own choice."

So what is happening now is that European banks are slowly shedding their foreign sovereign debt and buying the sovereign debt of their own countries. More Italian debt is coming home to Italy, Spanish debt to Spain, and so on. Given ECB funding, this process will go on for several years.

And at some point, if Spain or Italy decided to partially default, then European banks will be able to absorb the losses. If one of the peripheral countries does not get its budget in order, then it too will have to face the music of austerity and rolling recessions, just as Greece is, in order to get funding from Europe.

If, as an example, Europe decides to no longer fund Spanish debt (at the cost of German and other taxpayers) without draconian austerities, what then? Since Spanish debt will mostly be in the Spanish system (banks, insurance, pensions, etc.), if Spain decides to leave the eurozone it will be much easier on the larger European system.

I think the very fact of allowing (encouraging?) the various countries to bring the debt home to internal banks and institutions is in fact increasing the likelihood of exit from the eurozone, when a future crisis occurs . It's all well and good to talk solidarity, but continuing to fund the peripheral nations at the cost of other taxpayers, with the accompanying damage to the euro, will soon wear thin on voters in those other countries.
This is exactly as socionomics predicts would happen during negative social mood. What's interesting in this case is that this is a very political process. The argument for a euro breakup, but not an EU breakup, is that the political leaders are too invested in a united Europe and the people support it. Yet the nationalizing of debt is a very deliberate political strategy that allows each nation to act in its own interests. In the future, European nations will have an easier time ignoring problems in neighboring countries or acting in a purely selfish manner to "profit" at their neighbors' expense. Nationalism is more popular in Europe and now the ECB and financial system are making it easier to be a nationalist. Coincidence?

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