Europe’s Perfect Economic Storm

What happens when an economy attempts a cold shutdown of one of the biggest debt spirals that the world has ever seen?  Well, buckle up and buy lots of canned tuna, we are about to find out.

Europe’s ruling politicos have decided that they are going to “take their medicine” and put strict limits on budget deficits. They have also decided that the European Central Bank is not going to engage in reckless money printing to “paper over” the debts of troubled nations.

This may sound great to small-government conservatives, but the reality is that there is always a tremendous amount of pain whenever a massive debt spiral is abruptly interrupted.

The Conservative Plan Illustrated

Take Greece.  Greece has been forced to raise taxes and implement brutal austerity measures.  This action has caused the economy to screech to a halt, with tax revenues rapidly declining and its debt not improving as much as anticipated.

So Greece was forced to implement even more brutal austerity measures.  Well, that caused the economy to slow down even more and tax revenues declined again.  Greece has repeated this cycle several times and now Greece is experiencing a full-blown economic depression.

Simply put: 100,000 businesses have closed and a third of the population is living in poverty.

Inexplicably, Germany and France still intend to impose versions of the “Greek solution” on the rest of Europe.  This is going to create the conditions needed for an economic “perfect storm” to develop and it means that the European financial system is heading for an implosion of historic proportions.

I’m not foolish enough to think that ANY plan would not have its own measure of pain, but if Greece is experiencing this magnitude of disruption, extrapolate that and see what America will look like.

Great Depression 2.0

America now “boasts” 50% of its population is classified as poor, or below the poverty level.

If you want a very accurate depiction, go to the library and grab a reputable book on the Great Depression. Aside from striking similarities to what was happening in American then and now, Europe is experiences are equally and eerily similar.

Europe has decided to do something that is unprecedented in the post-World War II era.  They have decided to put very strict limits on budget deficits and to impose tough sanctions on any nations that break the rules.  They have also decided that they are not going to allow the European Central Bank to fund the debts of troubled nations with what has been described by conservatives in America as reckless money printing.

Without a doubt, this is a German solution for a Germany-dominated Europe.

But this situation was caused in part by Germany’s desire to compete on a global scale with America, but with fatal flaws that were evident from the very beginning. To attempt a multi-nation currency solution without insisting that any country involved adopt a similar fiscal policy was irresponsible at best, and lunacy at least.

In fact, this austerity solution is going to make a massive financial collapse much more likely.  The following are obvious signs that the European financial system is heading for an implosion of historic proportions….

  1.  As noted above: According to the Financial Times, 100,000 businesses have shut down, a third of the population is living in poverty and there is rioting in the streets.  That same austerity is about to be imposed in almost every single nation in Europe.
  2.  As the economy has slowed in Europe, unemployment is rising dramatically. There are already 10 different European nations with an “official” unemployment rate of over 10 percent and the real recession has not even officially started yet.
  3.  The EU nations that are drowning in debt will need trillions of euros in bailout money just to survive, but Germany and the other wealthy nations of northern Europe are already reticent to hand over trillions of euros.
  4. The European Central Bank could theoretically print up trillions of euros and buy up massive amounts of European sovereign debt, but this would go against existing treaties and most of the major politicians in Europe are adamantly opposed to this solution. Without such intervention it is impossible to see how the ECB will be able to keep bond yields from absolutely skyrocketing.  In fact, without massive ECB intervention it is hard to see how the eurozone is going to be able to stay together at all.  Graeme Leach, the chief economist at the Institute of Directors, said the following recently…

                      “Unless the ECB begins to operate as a sovereign lender of last resort function, with massive purchases of eurozone public debt, the inexorable logic is that the eurozone will break up.”

5.  European leaders are hoping that the new treaty that was just agreed to will be ratified by the end of the summer.  In reality, it will probably take much longer than that.  German Chancellor Merkel has made it clear that the solution to this debt crisis is going to take a long time to implement….

“It’s a process, and this process will take years.”

Unfortunately, Europe does not have years.  Europe is rapidly running out of time.  A massive financial crisis is steamrolling right at them and they need solutions right now.

So will the U.S. Federal Reserve and the European Central Bank keep lending them money once they are out of acceptable collateral?

If not, we could start to see banks fail in rapid succession.

Charles Wyplosz, a professor of international economics at Geneva’s Graduate Institute, is absolutely certain that we are going to see some major European banks collapse….

“Banks will collapse, including possibly a number of French banks that are very exposed to Greece, Portugal, Italy and Spain.”

Bank runs have begun in some parts of Europe.  For example, a recent article posted on Yahoo News described what has been going on in Latvia….

Latvia’s largest bank scrambled Monday to head off a run among depositors who were gripped by rumours of the bank’s imminent ruin.

Weekend rumours that Swedbank was facing legal and liquidity problems in Estonia and Sweden sent thousands of Latvians to bank machines on Sunday, with some lines reaching as many as 50 people.

The Perfect Economic Storm

Europe is in a massive amount of trouble.

The equation is simple….

Brutal austerity + toxic levels of government debt + rising bond yields + a lack of confidence in the financial system + banks that are massively over leveraged + a massive credit crunch = A financial implosion of historic proportions

Unless something truly dramatic happens, the economy of Europe is dead .

There is no way that Europe is going to be able to substantially reduce the flow of money coming from national governments and substantially reduce the flow of money coming from the banks and still be able to avoid a major recession.

Look, I want it to be very clear that I am in no way advocating government debt in this article.  It is just that under the debt-based monetary paradigm that we are all operating under, there is no way that you can dramatically reduce government spending without experiencing a whole lot of pain.

An economic “perfect storm” is developing in Europe.  All of the things that need to happen for a major recession to occur are falling into place.

I would advise readers to stock up on canned goods, but The United States of America can now call you a terrorist if you are found to have more than seven days worth of provisions on hand.

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  1 comment for “Europe’s Perfect Economic Storm

  1. Jack
    December 19, 2011 at 12:56 pm

    Harv – I have to take issue with this article. The current economic crisis in Greece did not just happen. It is the result of decades of government spending that is more than the country is taking in. Civil servants who are on golden plans while the rest of the country has a much less desirable employment picture.

    We are now seeing this in our country. Debating whether or not we should cut spending so drastically now is like debating whether we should take our medicine with a spoon or drink it straight out of the bottle.

    The real issue is liberal induced give aways that have crippled the country. OK spend some more – see what happens.

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