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Europe's Hangoverby Gary North Recently by Gary North: Too Many Eurozone Summits
Think of Europe's finances as a gigantic liquor supply system. There is a system of profit-seeking taverns (commercial banks). There is a clientele (sovereign states). Finally, there is a distiller (the European Central Bank). The governments have been on a bender like none seen in modern times, especially those governments in sunny climates, plus Ireland, which has always known how to have a party. They all ran up their tab with their bartenders at pubs throughout the continent. It looked like the party would go on forever. It didn't. The morning after began in October 2008, but the hangover hit Europe in full force in the spring of 2010, when Greece announced that it could not pay its bar tab. It turns out that none of the PIIGS nations can. At best, they can make token payments. This is true of all of the governments, but the ones in the north still have pretty good credit. The taverns can remain open to keep the clients coming in, but the party is clearly over. It's down to regular patrons consuming a few beers and making token payments on their tabs. The trouble is this: the governments, like all alcoholics, have built up a tolerance for booze. It takes more and more just to keep their heads from hurting. They are no longer looking for a high. They just want to get through the day. They are now morning drinkers. Afternoons, too. How did it happen? It began with the European Central Bank in 2000. It controlled the flow of funds. It did not keep a tight hand on the spigot. The party got out of hand.
THE TASKS OF CENTRAL BANKERS Almost every nation has a central bank. The bank does three things: (1) it supplies the government with funds at low interest rates; (2) it limits the expansion of money by the commercial banks; (3) it bails out the largest banks when a banking crisis hits. It officially promotes the first two goals. It does not talk about the third. Beginning in October 2008, the third task has become dominant in the United States and Europe. The main bailouts took place in the United States. Large European banks got lots of aid from the Federal Reserve, but this was done quietly. The FED concealed this from the public and Congress. Europe is the scene of the latest crises. These show signs of becoming a permanent condition. The crises are escalating. Four groups are involved: (1) the European Union; (2) the individual nations; (3) the European Central Bank; (4) the commercial banks. The ECB so far has been adamant that it will not supply money – "booze" – for the hangover-impaired PIIGS. It has done so on the sly, and in violation of its charter, but it is trying to save face. It is trying to look responsible. The problem is, the PIIGS may soon default on their bar tab. The tavern industry may go under. And that would affect all their other clients, who would not be able to celebrate. It is bad enough that the PIIGS are in severe hangover mode. If the northern nations, especially France, cannot pay their tabs, the tavern industry goes down. If the largest commercial banks fail, this will create a domino effect all over the world, just as it did in 1931, when Austria's Creditanstalt bank failed. The leaders of Europe are terrified of this prospect. They should be.
From the beginning of the Greek debt crisis in April 2010, the Greek bailout has been about saving the banks that had purchased the Greek government's IOUs. The member states must be provided with euros, so that they can continue to make interest payments to the banks. This has left the hangover-burdened governments of the north with the task of coming up with bailout money. The money is going to Greece. This is a test of the north's willingness to supply the money to banks by way of the Greek government. The northern nations are using the European Financial Stability Facility to do this. But this has proven insufficient to control the panic. Another bailout facility is now being considered, one that is much bigger and more permanent. It is called the European Stability Mechanism (ESM). THE EUROPEAN STABILITY MECHANISM A new European Union treaty is now being considered for ratification by Europe's parliaments. The public is in the dark about it. There is no suggestion by European leaders that this document should be submitted to the voters. They know it would be turned down flat. The treaty deals with European debt. A new international agency will be set up which will have the power to compel every European government to fork over at least a trillion dollars' worth of euros. It is an imitation of the International Monetary Fund. Member nations will put up money, much of it borrowed, to create a default insurance fund. The IMF used its money to bail out Third World governments that threatened to default on money borrowed from the commercial banks of rich nations. But the ESM must deal with nations inside the eurozone. They have borrowed far more than Third World nations ever did or could have. This initial call for Europe's national governments to pony up the cash will be merely the first round. The key word is "initial" This is from the "preamble" of the treaty, before the articles.
(4) If indispensable to safeguard the financial stability of the euro area as a whole, access to ESM financial assistance will be provided on the basis of strict economic policy conditionality under a macro-economic adjustment programme and a rigorous analysis of public-debt sustainability. The initial maximum lending volume of the ESM, after the complete run down of the EFSF, is set at EUR 500 000 million. 
Once the money is gone, there will be further calls for more rounds of contributions. This is what the IMF has done for decades. (My first task on the job as Ron Paul's staff economist in June of 1976 was to write a minority report against the IMF's call for more funding, which Congress soon granted, virtually without opposition.) This is what the ESM will do. After all, "initial" means "first round." Any nation that refuses to add to its commitment will lose a proportionate voting share. It is like the dilution of a stock. Access to future bailout money will be reduced. No nation will lawfully be allowed to refuse to pay up its fair share, once it commits.
ESM Members hereby irrevocably and unconditionally undertake to provide their contribution to the authorised capital stock, in accordance with their contribution key in Annex I. They shall meet all capital calls on a timely basis in accordance with the terms set out in this Treaty (Article 8, Section 4). The money will be used to create a stream of income for the largest banks. This will be the ultimate big bank bailout. The treaty does not mention the banks. It speaks only of nation-states. But the final beneficiaries are large commercial banks, which lent the money to the PIIGS. They are being threatened with non-payment. The PIIGS cannot pay off their bar tabs. They may not be able to meet payment for more drinks. Their hangovers may get so bad they are forced into withdrawal. It's the DTs for southern Europe. Tavern owners around Europe and around the world shudder at the thought. THE KEY WORD IS "IMMUNITY" The ESM will have total sovereignty over the bailout money. Once pledged, the individual nations will have no sovereignty over this money.
The treaty is 55 double-spaced pages long in English. A researcher will get to the heart of the matter by searching for the word "immunity." Here is the crucial passage.
The ESM, its property, funding and assets, wherever located and by whomsoever held, shall enjoy immunity from every form of judicial process except to the extent that the ESM expressly waives its immunity for the purpose of any proceedings or by the terms of any contract, including the documentation of the funding instruments. (Article 27:3) This is the classic mark of political sovereignty. The agency which possesses the power to issue commands is not subject to any higher court with respect to these commands. Those under it answer to it; it answers to no one. Immunity means sovereignty. The conspirators, beginning with Jean Monnet at the Versailles Conference (1919), have worked to persuade parliaments to surrender economic authority on the terms of cross-border trade. This authority has been transferred, year by year, to international regulatory agencies that do not answer to the parliaments. This is a surrender of political sovereignty under the cover of economic liberalization. The member governments gave up the right to impose tariffs, i.e., sales taxes on imported goods. What did they get in exchange? Economic growth. But any nation could have attained this goal merely by unilaterally legislating reductions of tariffs and quotas. It would have taken no binding treaty to do that. Then why the earlier treaties? They were a means of creating acceptance of cross-border agreements that transferred sovereignty to a series of inter-European regulatory agencies. This precedent was a kind of lobster trap. The deeper the economies of the nations relied on each other to extend the division of labor and increase per capita wealth – a legitimate economic goal – the more dependent they became on the continuing authority of the inter-governmental regulatory bureaucracies. They got used to the idea of surrendering sovereignty along with the surrender of economic authority to the free market, as guided by the bureaucrats. This was managed trade, not free trade.
The regulatory agencies received judicial immunity from lawsuits from member nations. This was crucial for the extension of the New World Order. Equally important was the creation of a judicial lobster trap. Once bound by a treaty, a nation's parliament cannot secede. Anyway, this is the official position of the inter-governmental bureaucracy known as the European Union. The European model was the Germanic Zollverein, or customs union, which began in 1818 and continued to expand until 1871. It eliminated tariffs between separate national jurisdictions, and it subjected them all to high tariffs nationally. This led to the establishment of national sovereignty in 1871: Germany. It was begun by Prussia, and it culminated in a nation dominated by Prussia. After 1871, secession was militarily impossible. Critics of the Common Market have been warning against the economic unification of Europe ever since the formation of the European Coal and Steel Community in 1951. This was the predecessor of the Common Market (1957). They have said that economic liberalization under a series of treaties was a gigantic bait-and-switch operation, that the ultimate goal was the destruction of national sovereignty in Europe. They were right in 1951. For 60 years, they have been right. Any politician who dared to criticize this process was crushed. This is still true. The unification agenda remains unassailable, despite voter resistance. TIMELINE The ESM treaty was released to the public on July 11, 2011. We read this on the website of the European Commission's Economic and Financial Affairs.
On 11 July, finance ministers of the 17 euro-area countries signed the Treaty establishing the European Stability Mechanism (ESM). The Treaty follows the European Council decision of 25 March 2011 and builds on an amendment of Article 136 of the Treaty on the Functioning of the European Union (TFEU). If the treaty is ratified by December 31, 2012, the New World Order of Europe will come into full-scale maturity on January 1, 2013. Once the bankers have a near-guaranteed bailout arrangement, international political power over money is transferred to them. The details of who pays how much inside each nation's borders is irrelevant to the bankers. The bankers' reckless lending and the politician's insatiable demand for borrowed money has created the crisis. The solution? More of the same.
Ministers reaffirmed their absolute commitment to safeguard financial stability in the euro area. To this end, Ministers stand ready to adopt further measures that will improve the euro area's systemic capacity to resist contagion risk, including enhancing the flexibility and the scope of the EFSF, lengthening the maturities of the loans and lowering the interest rates, including through a collateral arrangement where appropriate. Proposals to this effect will be presented to Ministers shortly. How long will this go on? Until the eurozone breaks up. The key word is "multi-year."
I like that: "credit event." It means "selective default." That would trigger a crisis: default-insurance contracts. The issuers would have to come up with overnight money in the hundreds of billions.
While the responsibility for resolving the crisis in Greece lies primarily with Greece, Ministers recognised the need for a broader and more forward-looking policy response to assist the government in its efforts to bolster debt sustainability and thereby safeguard financial stability in the euro area. So, the press release coincided with the release of the treaty. Greece got the headlines. The press release hinted at what is to come.
Ministers commit to continue negotiating with the European Parliament the legislative proposals to reinforce economic governance in the European Union in order to agree on an ambitious reform as soon as possible. The reinforced governance should be fully operational without delay. In other words, the timing was perfect. The public was focused on Greece. The heart of the matter was the ESM treaty – the so-called "ambitious reform." Let us return to the promotional page for the treaty.
As of 1 July 2013, the ESM will enjoy preferred creditor status similar but junior to the IMF. Euro-area Member States will support equivalent creditor status of the ESM and that of other EU Member States lending bilaterally alongside the ESM. . . . This is another layer of multinational lending. The goal is officially to keep member nation-states from falling into insolvency, i.e., not being able to make regular payments in their bar tabs. They need to do this in order run up their tabs day by day, "just to clear our heads." The ESM is about preserving the nations' ability to keep the taverns in business. The document ends:
The treaty now needs to be ratified by the euro-area Member States before 31 December 2012 to enter into force following approval of signatories representing no less than 95 % of the total subscriptions. We see here the extension of the grasping hands of the EU. It must grasp, for it must stand ready to bail out the PIIGS, so that the PIIGS will meet their interest payments to the banks. The EU is trying to bypass the voters. It wants no public debate over whether to pony up the cash to the EU's ESM. The EU's lack of control over national fiscal policy is mitigated if the ESM can get parliaments to vote for a European-wide safety net. The pitch: "If you don't pony up, there will be no bailout for you." The politicians know how close to the edge every nation's finances are. They want a safety net. That's what modern politics is all about: buying votes by promising safety nets. CONCLUSION
The taxpayers will revolt in Europe. The Eurocrats think they can gain sovereignty by getting legislators to agree to another treaty, once and for all. They can't. At some point, the nations will default. A Great Default is coming. This may be all at once. It may be piecemeal. But the big banks will get stiffed. So will the voters who have become dependent on income promised by politicians, who will finally have to go cold turkey. The DTs are coming. November 9, 2011 Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible. Copyright © 2011 Gary North
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came up with three laws of bureaucracy 40 years ago.