Wednesday, November 16, 2011

Europe: Economics No Longer Matter; Why ECB Will Act in a Massive Fashion

From Krugman recently, quoting Ed Harris:

If the ECB writes the check, the economic and market outcomes are vastly different than if they do not. Your personal outlook as an investor, business person or worker will change dramatically for decades to come based upon this one policy choice and how well-prepared for it you are. [ italics mine]

My read of the treaty and especially Protocol 6 shows the ECB is so empowered and mandated to do such an action.

The risk to the US here is no longer contagion, but whether a window of opportunity, which has what will be likely a short lifespan, is missed. ‘Decades to come” is right. The form of Europe for decades to come is about to be defined and the USA will have to abide with that form taken decades to come.

Merkel and the political establishment in Germany, especially the CDU, does not wish Germany to subsume under a European federal governance. That has been, of course, the driving force implicit or explicit in German foreign policy for well over a century.

If Merkel and Germany will have their way, it seems an implicit German hegemony will be ratified via treaty changes – at best a confederation and at worst a “post-democracy” neo-Hanseatic League will be the results.

It will be impossible for Europe to have any hard power with this Merkel structure and if the German goals are ratified this irrelevant Europe will be the status for decades.

The US will find, with Merkel/German structure, absolutely no support of any kind going forward and will in fact have to increase our military presence in Europe. Europe will ride on the US for decades for security. A good question is whether or not the USA can afford such a “free loading”, receiving all the blame for all problems, and not acknowledged or receiving any benefits from the security provided. Asymmetrical adventures will be constantly visited on the USA. It should always be remembered the 9/11 planners were based, for the most part, in Hamburg as the Habermas “deliberative” soft power culture breeds such nihilists and terrorists.

The USA is decoupling or has decoupled financially and market wise from Europe, and soon the usual isolationist and fiscal conservative reactionaries – the “Peterson” crowd will dominate once insulation from European problems is thought to have been achieved.

US financial institutions are now, I think, adequately firewalled against Europe. I suspect the US is about to show solid growth and equity values will increase enough so as to offset the wealth problems from housing and to allow the isolationists to direct the European discussion. Soon, if not now, the crisis in Europe will not matter to the average American, nor wil it have any significant impact to US market values.

Europe in aggregate is mighty. There is high likelihood that expedient measures will be found by Europe to calm Europe long enough to allow Germany to impose their model, especially if the US asset values start to improve with some recovery.

Therefore the sense of crisis is likely to quickly abate and with it the suasion the USA might have in defining the form Europe will take for the next several decades.

Again, that form is being defined now.

The present is a point in time with even more importance than when the European Coal and Steel Community or the Atomic Energy Community were being agreed to under US occupation during the Eisenhower era. In many ways the current form of Europe can be seen as being at least permissioned by the USA if not authored by the USA. That definition lasted in form for the 60 years and yet was set in a very few years window back in the 1950s. We are now back into such a defining window time span and the USA will have to live with whatever is formed likely for the same long time period (to 2060) as the last defining era.

The ECB actions or non-action will be similar in importance in terms of defining Europe to the Jean Monnet flurry of organizational designs in the 1950s. The US of course felt the need and the authority to participate at that time . The end results of this European design – Lord Ismay’s “keep Russia out and Germany down”, a “dual containment”, worked wonders and brought great prosperity and peace and security to the area if not the world for the next 60 years. It was perhaps one of the greatest triumphs of US diplomatic foreign policy.

The US is authorized now, as then, to have just as much voice during the current defining moment as in the Eisenhower era. And now the USA is multitudes more powerful than it was then.

The current German model or thrust, a confederate or technical neo-Hanseatic League Europe, will be, in the long run, a severe failure for US foreign policy. It would set the world on trajectory for severe social strife in Europe, the adjacent areas to Europe – all of which present massive risk of economic refugees as well as civil war. The Arab Spring has turned to God knows what – and may actually have become a clever counter move by the Islamist after defeats in Afghanistan, Iraq and likely Pakistan. And so on. All of which would be fueled if not able to cause great mischief by a weak, confederate, technical, post-democracy, and neo-Hanseatic League Europe.

Europe must be in form where up to 10% of the populace can be in arms in a general mobilization and at least a 1.5 MM to 2 MM standing military force with at least 2 ½% of GDP spent on security. It is an impossibility for Europe along the lines coming out of Germany now to be so empowered.

Only a Europe in federation could possibly provide such security.

Not to mention only a Europe in federation can provide prosperity and order for the European populace.

Since this “window” is closing, and what is closing it is what will be a semblance of abatement of the crisis and recovery in the USA markets and GDP – the USA must either maintain the crisis pitch or force its conclusion via any action which immediately starts Europe on the road to federation.

From everything I can gather the ECB under Protocol 6 of the Treaty of Europe (Lisbon) is the only European federal institution empowered to take measures that irreversibly set Europe on a road towards federation. Germany will be of most adamant voice against such a move – but their obligation and the true nature of their power (they are in reality a very large Luxembourg) and the blood debt they still owe the USA and especially all of Europe will make them comply.

Unless a better pathway can be found to bring European federation, the ECB should be immediately encouraged by the USA to proceed with an aggregation of all EZ sovereign debt, bringing their balance sheet towards equivalency with the current QE impacted Federal Reserve balance sheet. The purpose of that move is to empower the ECB and establish it as the first federal structure in Europe and by its exercise of power to initiate a federal Europe, to aggregate all EZ sovereign debt bringing all bond values in alignment, and to then force a federal European definition so as to provide guidance and financial policy going forward. While this is occurring on a federal asset side of the balance sheet – and in 1790 the USA did a similar procedure but on the debt side of the balance sheet with the “Assumption of Debt” – the resulting federal structure will be the same. A read of the “Report relative to a Provision for the Support of the Public Credit” (1790 Hamilton) or excerpts is very useful as well as the several Federalist Papers written prior, especially #21.

The technical issues involving the European debt crisis is now well digested by the market place. It is for the most part clearly understood by policy makers. But a major error seems to be that a “Rogoff” mentality of perceiving Europe as a solvency crisis is being applied – which is correct if the German model or proposals is followed. But if Europe is perceived as a liquidity crisis amidst a fairly standard constitutional crisis with rich historical precedent and instruction, then the problem becomes one of how is the constitutional crisis remedied and what form of remedy would be most aligned with USA interests going forward.

That would be the remedy of constitutional formation of Europe via the only channel available, a significant QE or “buy all bonds” by the ECB.

The USA should consider using every form of persuasion and capability to have the ECB conduct such an operation, especially considering the window of opportunity is closing. Given this importance and the key strategic nature of the current time, it will seem obvious in hindsight afterwards, that the ECB is about to initiate a most significant LOLR operation.

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