Save Europe with Italian Reforms not Eurobonds!

23 Nov 2011    

News: Germany has declared war on the Eurozone - Anatole Kaletsky - UK Times

My old credit card just expired and last night I got a email from The UK Times asking me to update my billing details. I hardly read their paper anymore, Anatole Kaletsky used to be my favourite journalist, but to be honest he has become increasingly hit and miss, and this article is pure zombie.

Things in the Eurozone are pretty scary these days, so Kaletsky wants to save Europe and end the crisis with Eurobonds, and he calls Merkel's refusal to agree absurd. It’s typical of modern journalism, he writes a whole tirade about the need for German help without once mentioning “moral hazard”. It’s just a completely partisan rant, it has nothing to do with objective analysis of technical truth or ethical justice. Put all your emotions to one side and ask yourself what would happen if Germany went what we call "joint and severally liable" with Club Med right now. Do you think Club Med would use the money to change their life, or would German sovereign bonds just fall out of bed when the money vanished in a puff of smoke and Club Med came back looking for more?

Last week Kaletsky wrote a better piece saying: “Despite the 'Occupy Wall Street' movement and the swirl of rhetoric surrounding the protests, Western politicians are focused entirely on rebuilding the old failed system... [they have no long term vision of new economic models, nor even the short term will to implement the sort of long overdue structural reforms economists have been talking about for thirty years]... Germany pins its hope on fiscal discipline. France may have brought forward the raising of its retirement age from 60 to 62 but its politicians won’t consider further reforms. The US Republicans denounce any suggestion of increased taxes on millionaires as 'class warfare', while Democrats resist any reform of social welfare rules devised 50 years ago..”

But this week Kaletsky doesn’t care about economic paradigm shifts or even simple reforms, he just assumes they will automatically flow if Germany hands everyone cash. The truth is the people running Europe are millions of miles away from getting to grips with the reforms and austerity they need to survive this crisis, a fact which has been staring everyone in the face since the start of this crisis, and this frightening German stand off is probably the only hope of turning policy making around (remember my solution for implementing reforms is technocratic prison, and it relies on stopping bailouts and money printing and letting countries go to the brink).

Kaletsky is a child, he is full of emotional pain and screaming and not seeing straight. The truth is Spain can and should be made to struggle on without help, and even if we cared about short term suffering we would be looking at super senior overnight bridging loans, financing new Club Med debt with Eurobonds is better than the totally absurd Financial Times idea of the ECB buying bonds in the secondary market (risk to Germany reduced), but it's still poisonous.

In the last few days European Sovereign debt has collapsed, it was obvious that was coming and that's why a week ago I wrote numerous comments at the Financial Times urging them to focus on Monti's reforms. I said Monti has to impress the market with shock and awe economic reforms asap or the world will end in a week. In fact, on the 16-Nov-2011 I said on the news page of this web site:

Italy is at the forefront of a war, if the good guys win the world is saved, if the bad guys win a reign of terror is unleashed which ultimately ends in armageddon. The European elite don't normally have the stomach for this kind of bloodthirsty battle, but German puritans such as Jens Weidmann are refusing to let the ECB to keep on delaying the contest. So the battle is on at last! In this almightily conflict what are the key statistics we are looking for to see who is going to win? I think if Mario (commander of the elite Italian army) can take the Article 18 territory (the first of the devil's castles), we know good has a chance, but if he fails evil wins. Article 18 is basically something Berlusconi and Prodi and all the other failed leaders of Italy have been trying to repeal for generations, it relates to working practices, and everytime it comes up the entire country goes on strike. Come on Mario, remember Steve Jobs: If you know what you have to do, and you know you have no choice, and you know your life depends on it, you can find that Samurai like laser beam focus that can move mountains. I reckon we need Article 18 to fall within one week, or it's armageddon.

As it happens today is the 23-Nov-2011, one week from the time I wrote that, and Article 18 is nowhere to be seen, nor has "Super Mario Monti" implemented any other reforms, and today a German 10 year debt auction partly failed. These wretched journalists and the politicians running Europe who listen to them have already forgotten that we are waiting on Monti, their attention span is so miniscule they have already started looking elsewhere! In the last week the Financial Times, the so called newspaper of the elite, has published basically nothing about what Monti is doing, I have not seen one concrete proposal anywhere in the financial press, as far as I can tell he has already been given up for dead. So what should these fools be doing now that armageddon is starting?

When I started working in Financial markets many years ago we still talked about what governments have to do when they loose the support of investors (it used to happen to the UK quite frequently in the 1970s and 1980s). Governments in trouble have show they are serious about life by increasing interest rates. It is both a demonstration of political courage and a gift to international investors. Well the idiots running Europe have destroyed the international market for their sovereign debt even in Germany, and the way to get it back is a 100 basis point rise in Eurozone interest rates and a "no mercy" announcement by Merkel. What is a no mercy announcement? It's the sort of thing politicians used to do in the good old days. She stands up and says: "As God is my witness, as long as I run Germany you have my word of honour that we shall never ever print Euros, your Euros are safe. In addition I guarantee to you that we will torture and kill any country who dares to contemplate default, your sovereign bonds are safe. Come back, we are better than the Americans, the Euro is the best currency in the world. Know too that your European Sovereign debt is safe because I am the boss, and I will stop at nothing to make the feckless profligate governments of Europe honour their debts (perhaps Greece & Cyprus excepted)". If Merkel had the balls to do this she would completely change international perceptions and buy herself at least six months for the Monti to perform.

Of course at this point every reader in the world thinks I am insane because the idea of a rate rise in Europe horrifies them. But I am not interested in your pitiful emotional fear of pain, I just report matter of factly on the escalating devices we professionals would need to embrace in order to address your god forsaken stupidity. Of course there are other ways, but they will horrify you too. Technocratic prison for Greece is one, but the coolest of all would be to announce a Eurozone wide state of emergency. The President of every country exceeding the Maastricht Criteria would be made a dictator with unlimited powers for a three year period, and would therefore be able to immediately implement the vital reforms needed. That's what I call a real bazooka, but you won't read about it in the idiot press. The truth is saving the euro without costing the Germans a cent is trivial, the problem is the political dogma that gets in the way of every workable solution.

Mervin King said a intelligent thing recently: "I am all for sticking plasters as long as the core problem is addressed as well". Intelligent people have nothing against aid as long as economic reforms are given priority. It means our objections to help are all about enforcing discipline and reform, not because help is always wrong thing to do. But I am not going to write about all the possibilities because they are huge - for example with a state of emergeny eurobonds are a non-issue both because they would not be a risk and because they would not be needed anyway - the purpose of this article is simply to tell you to STOP BEING COWARDS AND EMOTIONAL FOOLS AND FIGHT LIKE MEN. Plato called justice courage, strength, self-control, judgement. I see none of these qualities at all in any newspapers or politicians.

So Anatole Kaletsky, all in all what you have written is garbage journalism, it’s shameful, it's cowardly, it's weak, it's self indulgent, it's stupid, it’s toxic and it's destructive to the world. I am not going to update my credit card details - goodbye Kaletsky - you have let me down - you are just like the rest – you are another zombie!

Talking about zombies some French guy emailed me today talking about genius of the FT's Wolfgang Munchau! Just because I have given Anatole Kaletsky a hard time in this article does not mean I am saying he is anywhere near the worst of journalists. Kaletsky is what Homer might call a "limp spearman", he is certainly not what Nietzsche might call a "cockroach". Munchau is one of the world's most destructive people, on the eve of one of the Greek austerity votes he urged the politicians to vote against austerity and for disorderly default! If the Greeks had listened to Munchau they would have had no cash points the next day. Why did Munchau try to get them to commit suicide? Partly narcissistic ideology, partly because hedge funds pay him to write evil rubbish.

Ordinary people think politicians killed Europe, but that's because ordinary people are clueless. One day they are going to wake up and realise that journalism killed Europe, especially so called elite Anglo-Saxon journalism - the hapless politicians just made the mistake of getting caught up in their absurd advice.

What's the best advice we can give Merkel and the Bundesbank? Ignore the newspapers, they are evil, they are poison, work it out for your selves. Ask yourself "What would martin Luther do?" if you don't feel pragmatic. In fact the newspapers are what we in financial markets call a "reverse indicator". If they like your idea you know you are probably making a mistake!