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Sep 30, 2011 | 11:40 GMT

10 mins read

Agenda: With George Friedman on Europe's Debt Crisis

STRATFOR CEO George Friedman explains why Germany, though the powerhouse of Europe, is in a weak position with the European debt crisis, and how elites' commitment to European integration is one cause of the crisis.

Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy.

Colin: Europe's leaders — the politicians, the bankers and the bureaucrats — seem locked in near-permanent session on trying to find a way out of the continent's debt crisis. The rhetoric rolls from their lips. We hear expressions such as "greatest challenge," "most dangerous phase," "spinning out of control" and so on. The uncertainty stabilizes the markets and frustrates forward planning and business. Welcome to Agenda with George Friedman here to join the discussion on Europe. George, first a simple question: who is actually in charge there? George: Reality is in charge of statesmen, politicians, policy makers. They're rarely in charge. They like to act as though they are, but the reality that's in charge here is that the European Union was poorly conceived. It was an institution that was designed to function very effectively in times of prosperity, which it fortunately had in its first two decades, but wasn't built to handle crisis. It has a decision-making structure that's very difficult to manage and, more important, the real power is in the hands of the nation states, not in the hands of the EU. Therefore these nation states are making decisions based on their own interest — the interests of their politicians and the interests of their citizens. And so the answer of who's in charge here is that: the EU is created so that no one be in charge here, so even more than most situations it's one that's inherently chaotic. Colin: George, people are already saying that the current package under discussion is too small — that's 1000 billion euros, which I think is about $1.35 trillion U.S. and that it needs to be increased, and the Germans won't be happy about that, and nor will the banks. George: It clearly is drifting on. The problem is this: the Greeks have voted most of the austerity measures they were supposed to. That doesn't mean they're going to enforce it. The cost for Geece of enforcing those measures would be overwhelming. It would mean instability in Greece — political chaos — and so they are not going to do that. So what we have here is a wink and a nod. The wink by the Germans saying, "okay you do austerity and we will give you money." The nod is basically from the Greeks, "Okay, we will accept money but we are not going to be really executing the austerity." So the real thing to look at here now is not all the statements and all the votes — it is what is the Greek government going to do? But the Greek point of view is that they're not bailing out Greece; they're bailing out the German and European banks that the Greeks owe money to. The money doesn't stay with them (with the Greeks) it goes to the Germans, and like any bankrupt — be it a major corporation, an American airline, an individual — they're not looking at how they got in this situation. They are looking at what happens next. What the Europeans are asking of each other is a level of austerity and control that they don't have the ability to enforce, and the Germans don't have the ability to enforce Greek laws. And that's the problem. Colin: Another tangential point. There are many in Europe who are arguing that this is not the time for austerity. What is needed is growth and major reform. George: You have two issues on table. One is the macroeconomic issue that the United States for example or even China, are experiencing. Is it better to balance the budget? Is it more damaging if you don't balance the budget for growth? Do you incur greater deficits? These are all discussions that nation states have. The problem the Europeans have is they cannot have that discussion because they have not built those institutions to manage things. In the United States, in the end, the stimulus package, if it comes out, and jobs package, if it comes out, is going to be managed from Washington, where there are institutions to do it and is enforceable across the table. You don't have that in Europe. In Europe, you're having other discussions and those discussions are: how can we save Europe's banks? And the second discussion that they are having is: how can we make sure this doesn't happen again? And very frankly Europe doesn't have the ability to control what constituent states do. Some of those states cannot live under the euro; other states aren't living under the euro, and are not sure they want to continue living within the framework they live in. You know it's interesting — people keep saying that the Germans are so powerful. I see it more that they are quite weak. I mean they are quite weak in two senses: first, defaults and stuff are going to hit them harder than perhaps other people; and second, they have far less control of the situation than they would like to have. In the end they are the ones in the headlights; they are the ones who don't know quite what to do; and they are the ones who are prepared to accept a wink and nod from Greece. Colin: And then there are the banks, and that reminds me of a quote by the famous economist John Maynard Keynes who said that if you owe the bank a hundred pounds then you're in trouble. But if you owe the bank a million, then they're in trouble. Well, they're in trouble now. There is really no easy way out. George: Well. There is a way out in the sense that the governments can subsidize them, as they did in the United States with the TARP and the follow on subsidies. That takes care of the problem of the banks, but where you get the money, and how are you going to assure that the wave of defaults doesn't just surge higher and higher? The basic problem here is that the Germans and northern Europeans have the cash and the Southern Europeans have a debt, and therefore the southern Europeans are much more powerful position than northern Europeans. You're in a very weak position in relation to your creditors before you borrow the money. After you borrow the money, they're the ones in a weak position. And so I read Europe in a way very differently than others in this sense that certainly the Germans are in a healthier financial position, but they have far more to lose from defaults, I think, than the other countries. In the end, you have an institution, moreover, that requires a set of European institutions that requires near unanimity in order to get anything done. You have a large number of countries — and we were just up the discussion about Slovakian politics and whether the Slovaks in the end are going to vote for a loan package through the banking system — and what becomes apparent is that there's something quite mad when the future of the European banking system and of many of the nation states is in the hands of Slovakian politicians and what they are going to do, not because Slovakia's particularly funny or anything like that. It's simply because it is a small country and with the rules of Europe, of unanimity, just about any country, including Matla now, may be a problem. Colin: So what is a way out of this? George: Well, I don't think there's any way out of this within the context of the European Union. The European Union creates three realities that are unsupportable. The first is a single currency that is designed to manage both the German economy and the Greek economy, which obviously is impossible to do. Second is a free-trade zone in which the world's second-largest exporter — Germany — is able to move its goods into any country that wants to buy it, and, therefore, essentially outcompete the locals. And finally you have a massive bureaucracy in Brussels, which tries to control and micromanage so much of the European economy and really doesn't have the ability to do so wisely. Now what the Germans are trying to do is rescue all of this. And the problem is the more they rescue all of this, the deeper the problem gets. Of course they don't quite know how to go in any other direction, but it's the rescue itself that's the problem, because it links together countries in a single fate that have totally different realities. The reality of Greece and the reality of Germany have nothing to do with one another and trying to manage them not only by these institutions but through unanimity, where the German-Greek relations are going to be dependent on Slovakia's vote, is sort of a recipe for disaster, and they're having it. Colin: Final question: Do we see the collapse of the eurozone, and then what happens? George: Well what Europe used to have was a series of countries, and these countries had their own currency, they managed their own economy, they borrowed money in their own currency or, if they wouldn't be leant money in their own currency, they borrowed money in some other country's currency based on that. However they did it, they did it for themselves and they suffered their fate. And it was not necessary that the entire continental-wide system collapse. The problem you have is that there is no way for the euro to collapse. It won't collapse. There has to be an orderly regression, and the ideology of the European elite is so committed to the idea of European integration that they have not yet coped with the fact that it was European integration that helped create this problem. They believe the European integration or greater integration is the solution. So long as that ideology stands opposed to the realities that have been created, there really is no hope but further deepening of crisis. I don't know at what point European elites say, This didn't work," and I don't know at what point they simply lose control and new political parties emerge that are anti-Europeanist. But clearly the issue is not so much collapse — it'll stay there — it is how you manage your way out of crisis you created? Colin: Well I think one thing is certain: There will be a lot more rhetoric. George Friedman, thank you very much for joining Agenda this week. Until the next time, goodbye.

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