Good piece by Yves Smith in Naked Capital.
EU Puts Periphery Countries on the Rack – 03/14/2011 – Yves Smith
Monday, March 14, 2011
EU Puts Periphery Countries on the RackFor those of you unfamiliar with medieval implements of torture, the rack was believed to be quite effective in extracting information, but generally by having a potential victim watch it in use, with the obvious threat that he was next unless he cooperated. The rack was not only terribly painful, but like most old school methods of torture, often crippled those who survived. (Civilized people, which now clearly excludes our President and those in influential positions in the Pentagon, now recognize that torture is good only for producing phony confessions). It was also employed in particularly gory executions, such as drawing and quartering.
The Eurozone seems to be using similar medieval methods on its debt-laden periphery countries with far less clear understanding that serious damage to the subject is a likely outcome. However, we have the unusual spectacle of a smidge of disagreement between two regular critics of the Eurozone “kick the can down the road and call it a strategy” approach to its interwoven sovereign debt/banking crisis. The trigger event was an announcement over the weekend of yet another adjustment in the funding mechanisms for countries at risk of default: an enlargement in the size of the rescue facility, a 1% reduction in punitive interest rates, some loosening of restrictions on the uses of the €440 billion facility (limited purchase of periphery country debt permitted). But numerous conditions were imposed on the subject countries. Ireland refused to accept the new terms because it would have had to give up its low corporate tax rate.…
….But high levels of unemployment among the young is the perfect tinder for more widespread protests. And as Evans-Pritchard points out, the creditor states cannot lay legitimate claim to the moral high ground:
The tenor is cruelly one-sided, as if this were a morality tale of wise and foolish sovereign virgins. The debtor states are made to carry opprobrium for what is at root a pan-European banking crisis.
Ireland and Spain never breached the deficit ceiling of the Stability Pact, though Germany and France did. They did not break the rules. If anything, it was the European Central Bank that broke the rules by running negative real interest rates and gunning the money supply.
In the end, default by Greece and Ireland is inevitable, and austerity policies that produce deflation will push more countries into default or restructuring. But as Munchau has repeatedly pointed out, the current wishful thinking among the Eurozone officialdom is that a crisis deferred is a victory, when it instead guarantees a worse explosion when the bomb finally goes off.
