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 Forecasting America's Destiny ... and the World's


Generational Dynamics Web Log for 30-Dec-2010
30-Dec-10 News -- A precarious Estonia joins the troubled euro zone

Web Log - December, 2010

30-Dec-10 News -- A precarious Estonia joins the troubled euro zone

U.S. revokes visa of Venezuelan ambassadador to Washington

A precarious Estonia joins the troubled euro zone

A country with a moribund economy is joining a moribund currency.

That seems to be what will happen on January 1, when Estonia will give up its proud kroon currency and become a eurozone country.

The economy of Estonia shrunk by nearly 14% in 2009, and unemployment is at 17.5%, according to the Economist. On the other hand, Estonia's public debt, at 4% of GDP, will be the lowest of the eurozone.

Will the euro survive 2011?

Estonia joins the euro at a time when a lot of people are asking whether the euro is even going to survive.

An analysis in the Wall Street Journal (Access) says that the euroland has moved a Greek tragedy to a farce:

"What a euroyear it has been. The show opened with a Greek tragedy and is closing with, well, a eurofarce. Greece found out it can't pay its creditors, Ireland thought it could but it couldn't, Portugal and Spain think they can, but they can't. And the Eurocracy responded with a farcical promise to set up an unspecified structure to raise an unspecified sum to pay an unspecified portion of those bills. Germany permitting. ...

The year saw the markets awaken to the fact that there are enduring differences between southern and northern Europe. No longer would countries running huge budget deficits be able to borrow on the same terms as Germany. No longer would income transfers to Spain be able to paper over that country's dependence on an unsustainable property boom, fueled by cajas ready to lend on the skimpiest proof that the loans would be repaid. And no longer would Portugal be able to persuade lenders to make credit available on reasonable terms despite the inability of its economy to eke out any discernible growth. In short, the party's over."

In this narrative, the "northern" countries include Germany, Austria and the Netherlands, which supposedly follow strict budget discipline. The "southern" countries are not all southern. They include the PIIGS countries (Portugal, Ireland, Italy, Greece and Spain), as well as Belgium, and are supposedly profligate.

In 2010, there were major crises in Greece and Ireland, and crisis seemed close in Spain, Italy and Belgium. The crisis is measured in the interest rates (yields) that investors are demanding for the country's bonds. If a country has to borrow money at 10%, as was happening to Greece, and the economy cannot grow at 10%, then the country is headed for certain default, and that appears to be the case now for all the "profligate" countries. We've also seen left-wing riots and demonstrations, sometimes violent, across Europe in response to austerity programs.

Despite the continuing political, economic and financial instability of euroland, the euro will probably survive in 2011, but not necessarily, according to Wolfgang Münchau, in a Financial Times (Access) analysis.

"So how is the toxic interaction of high interest rates, high debts, and low competitiveness going to play out from 2011? I would expect Portugal to be the next country to fall under the umbrella of the EFSF. The European Central Bank has been the only large buyer of periphery bonds in the secondary markets, and is now putting pressure on the countries concerned to accept loans from the EFSF.

What about Spain, Italy and Belgium? Spain should be solvent, but of course there always exists an interest rate/growth rate combination at which the solvency assumption breaks down. With 10-year yields no higher than 5.5 per cent, the approximate current level, I would expect Spain to go through a severe and long recession, possibly with further asset price falls. Productivity will probably remain low and unemployment high for the foreseeable future. But the country should remain solvent – miserable but solvent. If interest rates were to rise to over 6 or 7 per cent, perceptions of Spanish solvency may change.

The main risk for both Italy and Belgium is political. Italy’s banking system is relatively stable but a combination of high interest rates and continued low productivity growth could lead to a debt explosion. Without a stable government that can deliver reforms to boost productivity, it is hard to see how Italy can prosper in the eurozone in the long run. Italy is not a victim of the financial crisis and has so far managed well to stay off the radar screens of international investors. There is no guarantee that this will continue.

Belgium is sinking deeper and deeper into political chaos – and, unlike Italy, it also has a vulnerable banking sector. Belgium is not going to split, but that may not stop investors from panicking about the status of a federal debt that, like Italy’s, exceeds 100 per cent of annual gross domestic product. The underlying problem is that Belgium may not end up with a sufficiently strong central government to take the measures necessary to raise growth and consolidate public finances."

However, instead of Portugal, the next country experiencing a major crisis may be Italy, according to By Ambrose Evans-Pritchard in the Telegraph. "Italy's borrowing costs have jumped to the highest level since the financial crisis over two years ago, raising concerns that Europe's biggest debtor may slip from the eurozone's stable core into the high-risk group on the periphery."

From the point of view of Generational Dynamics, all of these analysts are overlooking the same thing. They all see the problems -- that these countries are headed for certain default that cannot in any way be avoided. And they imagine a scenario where economies become a little more sluggish, or problems grow a little worse.

What they never consider, beyond an occasional hint, is a full-scale panic, and it's full-scale panic that Generational Dynamics predicts MUST happen.

Additional links

The U.S. State Dept. revoked the visa of the Venezuelan amabassador to Washington, in retaliation for the rejection, by Venezuela's president Hugo Chavez, of Larry Palmer, President Obama's choice of ambassador to Venezuela. Chavez had been angered by comments that Palmer made about Venezuela earlier this year. BBC

The United Arab Emirates' embassy announced that Canadians traveling to UAE will have to pay stiff visa fees of up to $1,000. The UAE move is in retaliation for Canada's failure to approve additional landing rights for UAE-based airlines in Canada. CTV

Late in 2005, a Danish newspaper published cartoons depicting the prophet Mohammed. In one of them, Mohammed is wearing a turban shaped like a bomb with its fuse lit. In another, Mohammed is telling suicide bombers to slow down, saying, "Stop, stop, we're running out of virgins." (See "Cartoon controversy explodes into worldwide confrontations between Muslims and Westerners.") This controversy has continued to reverberate in the Islamist community. On Thursday, authorities arrested fir people suspected of planning a bombing attack on the Danish newspaper that published the cartoons. VOA

Palestinian officials plan to go to the U.N. Security Council in early January to present a motion condemning Israeli settlements in the West Bank and demanding a complete halt to their construction. VOA

Israeli rabbi's wives have issued a statement, widely condemned as racist, calling on Jewish girls not to have any relationships with Arabs. "Don't date non-Jews, don't work in places where there are non-Jews, and don't perform national service together with non-Jews," the letter urges. The statement also calls for a boycott of a supermarket that employs Arab men and Jewish women. Earlier this month, a letter from dozens of municipal rabbis urged Jews not to rent or sell homes to non-Jews. Haaretz

Some 40,000 homes and businesses across Northern Ireland are without water after large sections of an aging water main network burst during the thaw following the province’s coldest weather for decades. The government of Scotland has taken pity and is sending bottled water. Financial Times (Access)

California's Governor-elect Jerry Brown is preparing to take office with a budget plan that will raise taxes and slash services, including university systems and welfare programs. LA Times

(Comments: For reader comments, questions and discussion, see the 30-Dec-10 News -- A precarious Estonia joins the troubled euro zone thread of the Generational Dynamics forum. Comments may be posted anonymously.) (30-Dec-2010) Permanent Link
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