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Rodney's Ramblings: Euro Problems Again

"So they have done it again and with the usual hype that this solves everything. They have saved Cyprus. You really do have to wonder whether the European Union (EU), or the Euro zone can find any workable solutions to their problems. As before, their latest moves only worsen the likely outcomes.'' writes Rodney Gascoyne.

The problems started many years ago with an almost hidden agenda of a few select insiders, who always intended the Union to become the United States of Europe with them, of course, in charge of everything. France, with German backing, had meant this to be their heritage, but this fell apart when the left won the last elections and the new Government exited the cartel. The Germans are now alone on top and the only perceived open hand left to bail out the Southern nations’ extremes of spending and economic madness, over the last decades. However, the Germans are quickly running out of any appetite for bailouts.

Even after this fake start to economic union, as it was first portrayed, they had an unhealthy demand to expand member numbers, exacerbated further after the collapse of the USSR, to become a mismatch of unequalled economies of rich and poor nations, but now far too big to be managed by common agreement or coercion. Then they added to their problems with a hasty move to form a common currency back in the 90s.

They did have rules for membership of the Euro initially, as there was to be no fiscal union, but these were patently disregarded as many countries fudged their figure to gain entry, with the open collusion and foreknowledge of the bureaucrats in Brussels. Even the leading nations were the first to over spend deficit and debt limits, with no repercussions. After that the rules were a joke and generally disregarded by all. This allowed spendthrift governments to ignore simple economics and sensible rules of debt management, permitting irresponsible politicians to look good, as they curried favour with everyone.

Europe only really needed a Free Trade Zone arrangement between them, as initially offered. But slowly the insiders were creating the need to create a fiscal and full union where they could rule the roost. This is not what most members signed onto when they joined the club, but now there seems little escape. The French and Germans have been milking the EU for ages anyway, under the Common Agricultural Policy, where they have always been the major beneficiaries, and which has since the early years accounted for up to a third of the annual EU budget.

One nation that might decide to drop it all, is the UK, as they were never part of the Euro zone, but there will be big trade consequences to them if they do exit. But under recent EU rules, the Euro zone bailouts have also been subscribed to by the wider EU, and internationally through the IMF.

The problems with Cyprus remind you immediately of the Icelandic Crisis in their banking system about 5 years ago, although they were not a Euro country. They too extended their banking deposit system to attract foreign capital, to fund their short term needs to continuously cover budget deficits. Their banks were nationalized with depositors and bond holders losing big time, and their currency decimated.

The European banking system has been in trouble for years now, and their repeated stress tests were a joke, with the markets not fooled. Even their last set of stress tests were nonsense, trying again to paper over the cracks, now shown full force in Cyprus, made worse because they, similar to Iceland, operated like an offshore banking centre, seeking to attract huge foreign deposits. In their case, it was Russian money trying to escape the clutches of Putin. These are the same people who are now being asked to take a haircut of between 30 and 70% of their money now locked in Cypriot bank accounts. They will learn their losses when the banks there eventually reopen. There will be big Russian repercussions.

The Cyprus bailout will mean big losses for bond holders, bank shareholders and these uninsured depositors. It looked for a while, even insured depositors would also be asked for a contribution, but this caused uproar. Now the Dutch are warning that this blueprint will become the basis for future bank bailouts elsewhere in the EU. On this news, markets plummeted, and people Europe wide should now be guessing their insured deposits may no longer be safe. This too will cause a public tsunami.

The real lesson from Cyprus, though, is that the EU, IMF and Euro zone cannot be counted on in future to continue allowing markets, investors and depositors to think their funds are not at serious risk. The consequences of this, and financial structures in markets throughout the world, and not just in funding for national and corporate debt in Europe, could and should cause a complete rethink for how these issues are handled in future.

Can it really be too much longer, what with Italian, Spanish, Portuguese and other bond holders getting nervous, that a further round of problems cannot be waived off, by unspecified assurances from the European Central Bank, which have been all on offer till now, to stave off disaster and exits from the Eurozone, let alone the cascading failure of the EU itself? Is your money safe in your bank accounts?


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