Wednesday, February 10, 2010

More on the PIGS

From Gary North:
The crisis over Portugal, Italy, Greece, and Spain – PIGS – continues to escalate. Because they have surrendered their monetary policy to the ECB, these nations are unable to inflate their way out of the fiscal crisis. This leaves the following options.

1. Default on some or all of their debts
2. Pay higher interest rates
3. Cut spending
4. Raise taxes
5. Withdraw from the EMU
6. Withdraw from the EU
7. Wait for a bailout by the ECB.
8. Choices 2-7

There is a legal question regarding withdrawal. These nations have surrendered their national sovereignty to the New Europe. How can they regain it? At what price?

If they leave, the EU will have to impose sanctions. Military invasion is out of the question. Want to fight Spain across the Pyrenees? How about fighting Greece in the hills? So, the sanctions would be economic. A major one would be to impose high tariffs on these nations. The borders would be closed.

These four nations are ruled by politicians who cooperatively sold their nations' sovereignties for a mess of pottage: access to northern Europe's capital and markets. They are highly unlikely to secede.
So what options do the PIGS have? As North sees it,
The PIGS have no ability politically to cut the costs of national government. The welfare state mentality is universal. Politicians refuse to slow the rate of spending. Raising taxes will tank their economies. Politicians may try it, but there will be painful economic repercussions.

Rising interest rates will tank their economies.

This leaves only one possible solution: kick the can. Promise stability and growth. Promise that they will get their financial houses in order.

The welfare state is based on promises. All over the world, it is facing bankruptcy. But the voters believe in the promises, and politicians dare not tell the truth.

The PIGS are getting no help from the European Central Bank. The capital markets are raising interest rates. Their economies are still declining.

There is an answer: open default by the welfare state. I mean across-the-board default, all over the world. . . .

This will not happen.

Rising rates and recession in southern Europe look likely. That recession will spread across the borders.

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