Massive Bailout: EU Agrees on Multi-Billion Rescue Package for Ireland

Ireland has formally asked the European Union for financial assistance, and EU finance ministers have approved the aid. The size of the rescue package is not yet clear, but it could be up to 100 billion euros.

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Spain – the basket-case economy

Charlemagne: Old Spanish practices | The Economist

Spain has been identified by the European union as one of the STUPID countries, that are in economic crisis. The other countries are Turkey, United Kingdom, Ireland and Denmark.  The Economist points out that Spain chose to accept the Lisbon treaty, not for pragmatic reasons but for other reasons associated with the Franco era – a sense of freedom as a nation emerging from a particular form of Socialism.

Spain took over the six-month rotating presidency on January first, and one of its responsibilities will be the chairing of meetings to discuss the launch of the 2020 strategy for Europe. The idea of the 10 year plan is for boosting competitiveness and growth “to help pay for Europe’s generous welfare systems”. 

At the moment Spanish unemployment is heading close to 20% which is double the average among Eurozone countries, following the popping of a housing bubble. It is worsened by a two-tier labour market of hardcore permanent workers, and temporary contract workers (mostly consisting of young and immigrant workers).

When Spain became a member of the Eurozone, the trade-off was cash for modernization in exchange of Spain lifting the trade barriers and accepting competition. This actually worked well for Spain and Europe, however, there are other setbacks to consider.

One of the difficulties in Spain is the rigidity of the labour market. There does not seem to be a way to help Spain to become competitive by lowering labour costs, since they cannot devalue their own currencies. Without knowing the background of the Spanish labour market, i.e. the extent of unionisation in Spain it is difficult to put this in real context. If that labour is highly organized then any attempt to lower labour costs will meet with resistance. However, Spain does have an immigrant problem that is similar to some extent as the USA – illegal immigrants from Morocco. 

Since Spain is a Socialist nation, just like the UK it has a Welfare State system, including “free” medical. One of the problems of having a large illegal immigrant population is that this places a real burden upon the Welfare State, especially the hospital and education systems. If the illegal immigrants are not working, then they are being a drain on the economy since they would be expecting welfare payments. Until I learn more about the present Spanish economy, I have just one question: what percentage of the 20% unemployed in Spain is made up of illegal immigrants?

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The stench that is Goldman Sachs

Over the past year I have heard the name of Goldman Sachs in less than flattering terms. It is for that reason that I have noted the involvement of Goldman Sachs with the Greek Government, and a cover-up of the financial deficit in Greece. This cover up really stinks.

The Mail Online makes the following comment about the activities of Goldman Sachs and Greece:

Goldman Sachs struck a secret deal with Greece to help it mask its vast debts, it emerged yesterday.

The Wall Street giant is claimed to have reaped as much as £192million in fees by entering a complex currency transaction in 2001 that helped Athens borrow cash without putting it on the books as a loan.

The so-called ‘swap’ deal, while permitted under EU rules, helped Greece meet eurozone limits on government borrowing.

Read more: http://www.dailymail.co.uk/news/article-1251280/Goldman-Sachs-new-storm-secret-deal-mask-Greek-debts.html#ixzz0fg3VgZKJ

However, it should be noted that other European countries have also been involved in similar activities. Now if one looks at the various European countries that are now in crisis, one has to ask the obvious question: Were they involved in a similar swap deal that had the intention of masking the size of the country’s budget deficit?

Countries such as the U.K. are still feeling the pain of the FGC in 2008. That collapse had a lot to do with derivatives and swaps. I am not in a position to talk about the use of these derivatives and swaps because they are new financial instruments. However, what seems to be clear is that their use has not been for a good purpose. What is also clear that a Wall Street firm such as Goldman Sachs has obtained huge amounts of benefit as a result of participating in these deals.

The fact that the swaps are not new, and they have been used all over Europe makes me question what happened to the other merchant bank Beare Stearns. Was it this kind of swap that then defaulted that caused the collapse of Beare Stearns? At this stage, until I can find more information, I have to say that I have no idea on that subject, but I do want to know more about why it collapsed.

This information regarding Goldman Sachs and their dealings with governments all over the world is quite relevant to the present economic crisis. This bank has been used to mask government debt. When this happens there is good reason to be suspicious about what is going on in any country which is about to end up in financial collapse.

Europe in financial crisis – Brussels takes action against Greece

The European union is becoming unstuck. Those who were against this union, it seems, are being proved right, especially with the financial collapse in Greece. Last week Brussels took a hard line with Athens and Greece has been told that it must cut costs drastically under close European Union supervision. The risk premiums for Greek government bonds have risen drastically, which means that the country must pay higher and higher charges.

At least two other countries in the European Union are in trouble – Spain and Portugal. At this point in time these countries are being eyed with mistrust, whilst at the same time speculators are betting that bonds will continue to fall, and that these countries will not be able to continue borrowing money. They are in jeopardy of having their credit downgraded.

These actions have their own risks, and are putting in jeopardy the future of the European Union. If the trend continues then the monetary union itself could eventually collapse.

According to Nolling from Brussels, doing nothing is not an option. Greece, Portugal, Spain and Ireland must act now to drastically reduce their debts.

Der Spiegel reports:

The Commission doesn’t hold Greece solely responsible for the current euro woes. Experts close to Economic and Monetary Affairs Commissioner Joaquín Almunia say nearly every participating country is compromising the cohesion and stability of the common currency.

“The combination of decreasing competitiveness and excessive accumulation of national debt is alarming,” the experts wrote in a recent report, adding that if the member countries don’t get their problems under control, it will “jeopardize the cohesion of the monetary union.”

Differing economic development within the euro zone and a lack of political coordination are to blame, they say. In the more than 10 years since the euro was introduced, the Commission states, it has become clear that simply controlling the development of member states’ budgets is not enough. What that means, more concretely, is that the stability provisions stipulated in the Maastricht Treaty to regulate the common currency aren’t working, and member states need to better coordinate their financial and economic policy measures.

The European Union officials are watching with alarm as various countries with the Euro-zone struggle with their lack of competitiveness. Countries such as Germany, the Netherlands and Finland have current account surpluses along with high budget deficits.

You can read the whole of the Der Spiegel report here:

Europe is very much into socialism – the welfare state. Countries such as France have a huge number of unemployed people. If tax receipts are not matching outlays with regard to government budgets, then those deficits are inevitable. Greece has a problem for a variety of reasons, including a highly unionized population that goes out on strike very easily. In recent times there have been a large number of demonstrations in Athens.  The Greeks do not like the idea of having to tighten their belts and accept that changes are necessary because of the financial collapse of their economy.

One possible reason for the very shaky circumstances that now exist is the reaction to 2008 global financial crisis. That deficit spending which was lauded as being necessary to stimulate demand has had short term, and very likely long term consequences in the European Union. As a result of this reaction debt skyrocketed in Europe. For example last year Spain’s budget deficit reached 11% and that of Greece reached 13% and that is not sustainable in the long term.

As a result of these high deficits Brussels has intervened, and now these countries must face taking drastic measures and they must balance their budgets whilst simultaneously creating more competition on the labour and goods markets. The changes that need to be made include employees having to scale back on their wage demands; civil servants will face a cut in wages. One might ask what has caused this situation, is Germany to blame? Some of those countries now in trouble are blaming Germany, but in reality they need to have a long hard look at their own expansionist policies that have brought about this potential collapse.

The situation that now exists is very similar to the situation in the 1970s when we first encountered stagflation – that is the combining of high unemployment and high inflation at the same time. No country should adopt policies of government expansion without the necessary increase in taxation receipts. At the same time, these governments need to be aware that there are limits beyond which the population will revolt against taxation increases – or in other words there is a flight of capital that contributes the long term consequences of these expansionary policies i.e. stagflation.

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