The Next Stop for Revolution: Europe. Is the U.S. Far Away?

 

This past week we’ve seen yet another bailout scheme from euro-zone officials. This one is perceived to be the magic bullet to solve all of the failing monetary union’s problems. But I think we’ve seen this movie before …

Last June, the EU and IMF responded to a free-falling euro and a government bond market attack in Greece by promising to pour up to €750 billion into Europe’s weak countries to ensure their solvency.

It worked, for a while. The euro turned on a dime and went on to rally 26 percent over just 11 months and highly stressed government bond markets eased significantly, for a while.

But it did nothing to make the heavily indebted, low-growth countries in Europe solvent! As such, the stress in the bond markets quickly returned.

Again, government bond yields in Greece soared to record highs. And over time, the risk premium spread to Ireland, Portugal, and now to Italy, Spain, and Belgium. That’s close to 40 percent of the euro-zone economy at risk of insolvency.

Another Shock-and-Awe Type of
Promise to Solve the Euro-Zone Crisis

After many failed attempts, euro-zone officials went back to the table again this week.

This time, they’ve promised to soften the terms of their earlier bailout schemes for Greece, Ireland, and Portugal. It also appears they’ll increase the size of their bailout fund. And despite the European Central Bank’s warnings, they’ve indicated that private financial institutions in Europe would agree to alter the terms on their loans to the fragile euro-zone governments — that means a technical default.

But as expected, the ECB is already massaging its rule book so that it can continue accepting the bad debt (even defaulted debt) as collateral, thus allowing them to continue supplying liquidity to Greek banks. The intent: A technical default might not inflame the debt crisis or the European financial system.

The ECB came up with a new financing package for Greece and measures to prevent the contagion from spreading.

The markets immediately took that as good news. But we shouldn’t be surprised that politicians can sit in a room and devise a plan that suits themselves …

Left to their own devices, it’s increasingly clear that government officials and politicians will continue with this strategy of moving the goal posts down the field. As problems arise, don’t address them, just change the rules!

What started in 2007-2008 as emergency measures to avoid a global banking collapse has evolved into doing anything and everything in this global economic crisis to avoid the day of pain — in an attempt to manufacture a desired outcome.

And now, one thing is clear …

Only Public Uprising Will Stop
The Shenanigans in Europe

They’ve done it in North Africa; they’ve done it in the Middle East: Ousting bad leaders and, in some cases, provoking full-blown revolutions.

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And all signs point to Europe as the next place for social unrest to erupt.

Back in June of last year, when Europe was at the edge of the cliff, officials tossed out the laws that the European Union was built upon and began transferring taxpayer money from the rich countries in Europe to the poor countries.

This was the first step by the leadership in Europe, namely Germany and France, in executing their favored solution: Federalization.

Amazingly, Friedman’s insights are becoming more relevant with each passing day.

In other words: “The United States of Europe.” It’s a step that EMU leadership was unable to muster support for at the advent of the euro. But now within this crisis, they’re seeing an opportunity to ram it through, i.e., marrying the monetary union with fiscal unity.

This means the people of Greece, Ireland, and Portugal, as well as possible Spain, Ireland, and other euro-zone members, could lose their sovereignty.

Eurogroup chief Jean-Claude Juncker has already said Greek sovereignty is to be “massively limited.”

I don’t expect that to go over well with the people of countries with such deep history and culture.

The entire saga in Europe is playing out according to script, as renowned economist Milton Friedman warned before its inception:

“Europe’s common market exemplifies a situation that is unfavorable to a common currency. It is composed of separate nations, whose residents speak different languages, have different customs, and have far greater loyalty and attachment to their own country than to the common market or to the idea of ‘Europe.’

“The drive for the euro has been motivated by politics, not economics. The aim has been to link Germany and France so closely as to make a future European war impossible, and to set the stage for a federal United States of Europe. I believe that adoption of the euro would have the opposite effect.

“It would exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange rate changes into divisive political issues.

“Political unity can pave the way for monetary unity. Monetary unity imposed under unfavorable conditions will prove a barrier to the achievement of political unity.”

So while all of the media’s attention has squarely focused on the many solutions euro officials have come up with behind closed doors, perhaps we should be looking to the people of the euro zone for the catalyst that will end the game of kick the can down the road.

The question then becomes: Will the U.S. be next?

Regards,

Bryan

P.S. There’s not much you or I can do about the crises going on around the world today. But that doesn’t mean you have to sit by passively while your investments flounder! You see, there is always a bull market in at least one currency. And to learn how I’m helping my World Currency Trader members position themselves during this global unrest, click here.

http://www.moneyandmarkets.com/the-next-stop-for-revolution-europe-is-the-u-s-far-away-46112