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Generational Dynamics Web Log for 6-Oct-2008
European integration is collapsing as banking crisis spreads rapidly

Web Log - October, 2008

European integration is collapsing as banking crisis spreads rapidly

In the so-called "European Union," it's every country for itself now.

The good news is that if you're rich, you can now shift your money into a European bank, and be fully insured -- even for deposits in the millions of euros.

The bad news is that Europe is in the midst of a rapidly spreading bank crisis, and you can't be sure that the bank where you deposit your money will be around much longer.

The crisis was heightened on Sunday when a bailout plan for Germany's Hypo Real Estate collapsed.

Ireland was heavily criticized earlier this week when its Parliament voted to provide a $600 billion guarantee to all deposits, of whatever size, in all Irish banks. The reason given was that the Irish feared a run on Irish banks by panicky depositors afraid of losing their money.

European leaders, led by German Chancellor Angela Merkel, accused Ireland of a "going it alone" approach that ignored the needs of the entire European Union. Some leaders accused Ireland of trying to seduce depositors in other countries to move their funds to Irish banks, risking a run on OTHER European banks. But by Thursday, Greece had joined Ireland, by guaranteeing all bank deposits in Greek banks.

At a meeting of European leaders in Paris on Saturday to deal with the banking crisis, many leaders wanted to take a hard-line position that the banks must deal with their own problems. Hypo bank, in particular, already had a rescue plan in place, with $50 billion to be provided by other banks.

The European leaders particularly rejected a US-like bank bailout, mostly because it would be almost impossible to achieve. All American banks are regulated in the same way, but euroland banks in different countries operate under wildly different sets of regulations. So any attempt at a uniform European response to the banking crisis would immediately get bogged down in different details in every different country.

So the European leaders on Saturday agreed that they didn't know what they would do, but that they would do it together, en famille.

But it took only one day for the entire non-agreement to collapse completely. The other banks backed out of the rescue plan for Hypo bank, and on Sunday a panicked German government, still led by the same Angela Merkel, has guaranteed the savings in all German banks,

As of Sunday evening, officials in Berlin are having frantic meetings to rescue Hypo Bank before the European markets open, around 3 am ET.

However, the bigger picture is the weakness and continuing disintegration of the European Union.

It seems like years ago, but actually it was only four months ago, in June, when Europe was in chaos because Ireland rejected the Lisbon treaty, which had been meant to centralize the EU government. The Europeans would be nostalgic for that kind of chaos right now.

The euro currency, which only really came into existence in 1999, has never been considered entirely trustworthy. In fact, it's always been possible for any individual euroland country to back out of the euro and return to its national currency, as I described in 2004, based on a Morgan Stanley report.

Ireland rejected the Lisbon Treaty, putting Europe into a state of chaos as its hopes for a centralized government were dashed. And now, Ireland has led the way to destroy any common European strategy to deal with the world financial crisis.

Basically, the European Union exists only when everything is going OK; the European Union starts to disintegrate whenever there are any problems.

The events of the last week mean two things, both of which are extremely bad news:

The parade of bank failures is going to continue, and probably accelerate.

The countries of Europe will compete with one another, rather than cooperate with one another. It's every country for itself, now.

The deflationary spiral continues and accelerates.

(Comments: For reader comments, as well as more frequent updates on this subject, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (6-Oct-2008) Permanent Link
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Generational Dynamics Web Log for 6-Oct-2008 European integration is collapsing as banking crisis spreads rapidly

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Generational Dynamics Web Log for 6-Oct-2008
European integration is collapsing as banking crisis spreads rapidly