Monday, 22 August 2011

10:11 – The Euro continues to stagger toward its inevitable collapse. Finland, Austria, Slovakia, Slovenia, and Holland have now essentially pulled out of the second Greek bailout, calling into question whether Greece will ever see those funds. Other EU nations, which are still on the hook for their share of the bailout, are rightly questioning why their taxpayers should be subsidizing Greece while those of other EU nations are not. Ultimately, it may be up to Germany to carry the full load, and it’s by no means certain that German taxpayers will agree to do so.

There are increasingly shrill demands for Eurobonds, a proposed solution that will not and cannot work, as the Germans have made abundantly clear. Even if the Germans could somehow magically be convinced to go along with Eurobonds, those bonds would be self-defeating. In essence, Germany would be agreeing to take on the cumulative debt of the spendthrift EU nations, adding that debt to their own balance sheet. If that happened, Germany would lose its own AAA rating overnight, making the cost of its own borrowing skyrocket and causing bondholders to dump German debt and flee to perceived safer havens like the UK and the US bond markets. In effect, by agreeing to Eurobonds, Germany would be cutting its own throat.

There are only two possible solutions to the Euro crisis. First, Germany and the other fiscally responsible nations in the northern tier could withdraw from the Euro, leaving the Euro to collapse, along with the poor southern nations that would still be using it. Second, the EU could adopt complete fiscal integration, with all member nations completing giving up their sovereignty to the EU federal government. That’s not going to happen, and even if it did it would take so long to implement that the Euro would be just a distant memory by the time it was implemented.

We have such a transfer union here in the United States on at least two levels, with richer states subsidizing poorer states, and richer areas of a particular state subsidizing poorer areas of that state. We tolerate that because it’s been that way for so long that few people even think about it. But if the United States were a collection of truly independent states, much as the EU is now, the chances of those 50 states agreeing to form a federal union, with the fiscal integration and ongoing transfers from rich to poor that that implies, would be nearly zero. For that matter, there’d be nearly zero chance that the taxpayers of North Carolina would agree to implement the present system, where those of us in the rich urban areas pay a grossly excessive portion of state taxes, which are then transferred to poor rural areas. That’s the choice that EU taxpayers are faced with, and they’re simply not going to agree to it.

There is actually a third solution, but depending on it would prove truly catastrophic. The ECB can simply print more Euros, and use them to buy back worthless Greek, Irish, Portuguese, Spanish, and Italian debt with inflated (devalued) Euros. The ECB actually started doing this a couple of weeks ago, with the stated intention of propping up Spanish and Italian debt. The more responsible ECB authorities, fully aware of the implications of such an action, argued strenuously against doing it, but they were overruled. However, there’s a big difference between using inflated Euros to buy $30 billion of bonds a week for two or three weeks and spending $50 billion a week in inflated Euros for months or years on end. Even those ECB authorities who supported these bond buys on a short-term basis are very unlikely to agree to continue doing so indefinitely. Even they must realize that doing that must inevitable destroy the Euro, and in a period measured in months rather than years.

11:17 – Several days ago, I mentioned a very encouraging paper on broad-spectrum antivirals, which may eventually lead to a real breakthrough in viral therapies. Derek Lowe, a pharmaceutical chemist, has an interesting take on this paper. If you have any interest in antivirals, Derek’s column is well worth reading (as is the original paper).