Portfolio: Eurozone's Future To Rely Heavily On Germany
5 MINS READJul 28, 2011 | 13:43 GMT
Vice President of Analysis Peter Zeihan explains how the German redesign of the European Financial Stability Fund will secure its influence over the financially troubled states of Europe.
Editor’s Note:Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy.
Everyone is familiar with the general financial picture of the problems in Europe these days. When the euro came into existence it granted unlimited volumes of cheap capital to states that had no history of having access to moderately priced capital whatsoever. The result was a series of sovereign debt crises as the debt ballooned beyond the ability of these states to pay. The Europeans have been scrambling to find solutions, but ultimately the only one that might work lies in German hands. Germany, being the largest economy by far of the European states, does have within its power to transfer assets, financial assets, from northern Europe to southern Europe in order to stabilize the system. But it's no surprise that the Germans have been reticent because most of these states that are in trouble simply can't be saved. The debt problems are so severe that most bailouts, at least by normal standards, simply would not work. Normal bailouts share two characteristics. First, the terms are normally onerous. The part of this is to encourage states that have not yet asked for bailouts, and never asked for it in the first place. Second, a bailout is only appropriate if the entity that you're bailing out can't in time repair its finances and get back in working order. Neither of these conditions really apply to the weaker states in Europe. First, the conditions of the European Financial Stability Fund, the EFSF, that's the bailout program, are really not all that tough. Sure, they are easier than what is happening in the markets right now but this is not something I would consider onerous. Second, many of the states under bailout or who have been flirting with bailouts simply do not have long-term income potential. Portugal hasn't had meaningful GDP growth in the last decade; places like Spain and Italy and Greece are leading the pack in terms of bad demographics. Within the next decade it's very likely that these states will be unable to generate GDP growth north of one or maybe even two percent. Which means that bailout actually translates as permanent German support without steady transfers of German wealth to the weaker parts of the eurozone, this is not something that can be sustained and this is why STRATFOR has been so bearish on all things European since the beginning of this crisis. Because the Germans simply have not wanted to permanently take on responsibility for these weak states that can't grow on their own. But on July 21 the Germans made a decision that they were going to back the eurozone to the hilt. It all comes down to the way they changed the way that the EFSF works. Two major shifts: First, the EFSF no longer has to go back the Council of Ministers to get permission for a bailout; it can act on its own. Second, the EFSF can really take any action it deems fit. It can indirectly support a state by buying bonds directly off the market, it can pour money directly into a state's coffers, it can even go through and help a state that is arranging for a bank bailout. In essence, the Germans have committed themselves to permit bailouts of the weaker states and not just in terms of government but banking sectors too. From STRATFOR's point of view, Germany's commitment to this new program means that for us, the eurozone crisis is over. But there are two things you must keep in mind. First is why did Germany change its mind? Well, they got more or less what they wanted while the EFSF still exists and will basically be subsidizing all the poor European states and maybe even some of the richer ones; this is no longer something that is the province of the EU institutions in any way shape or form. The EFSF is not a branch of a European institution or the European Central Bank. It is a fully private institution, a private bank headquartered in Luxembourg, Europe's bank secrecy capital, and it's managed by a German, which means that while these bailout programs don't need any sort of European approval, they still need German approval. And Germany can impose whatever conditions it would like, financial or otherwise. In the next year or two there will almost certainly be follow-on bailouts of Ireland and Portugal and another bailout of Greece, bringing the total to three. And there will probably be full state bailouts for states like Austria and Belgium as well. Looking forward two to four years, Spain is entering a demographic catastrophe and will definitely need a bailout of its own; just not imminently. Italy with the debt to GDP ratio north of 120% is definitely going to need a bailout sooner or later, and by that point even France is starting to flirt with the danger zone. Finally, European banks are some of the most unhealthy in the world: Austria, Greece, Ireland, Italy, Spain all of them are going to need bank bailouts and probably even France and maybe even Germany. There are no shortages of things for the new fund to do, but the take away is that the Germans are in charge of that fund, which means that they get to decide exactly what it is that you have to do to qualify to get the money to be saved.
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