European taxpayers money is sucked into black holes

2011-08-14

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Image source: Entendance

European taxpayer money is being sucked into black holes in three ways. First through direct bailouts from governments to quasi-bankrupt private banks many of which are pracically zombie banks who rely on liquidity from the ECB to carry out their vegetable existence. Second through counter-productive self defeating bailouts to individual countries and third through the ill advised toxic structure of the EFSF.

Ever since the eruption of the crisis in Europe taxpayer money has been channeled time and again in the form of bailouts from the states towards banks and ostensibly to other states with the purpose of preventing defaults. This process has so far failed to stem the threat of defaults. It has only succeeded in buying time for politicians to perhaps come up with something better (or judging from their failing policies so far – something worse).

The crisis first came as a financial crisis, i.e. as a crisis that affected primarily the financial institutions, which stroke at the heart of the ill-regulated, highly interconnected, filled with toxic-assets, European banking system. To avoid a meltdown, a series of bank bankruptcies that would cause a huge shock in the entire system, governments were called to support their banks with bailouts, which were funded exclusively from taxpayer money (whether they should do that or whether they had alternative options is another issue).

This took place in all countries, with the case of Ireland being the most extreme example, as the state practically nationalized the private banks’ debt (which is the main reason Ireland came to the need of an international bailout). This was the first round of wasting taxpayer money. The second round is the one that is now underway in the form of the bailouts to individual countries and in the funding of the EFSF.

The EFSF will be remembered in history as an example of a financial mechanism that a collective of states should avoid at all costs. The EFSF is in fact a completely irrational venture which does not solve the problems of the Euro. It merely reshuffles them in exchange of postponing the inevitable collapse of the euro under its current structure. The reason why that is the case, relates to the toxic structure of the EFSF, which causes contagion and compounds the problems. By means of the EFSF, all euro member-states have managed to tie themselves to each other without solving the structural rigidities of the euro.

What Europeans have basically done, is that they have forced hardly-pressed countries to bail out (with their taxpayer money) their practically bankrupt partners. These states first undergo austerity “sessions” to save money and then they are called to give a sizable portion of that money in the form of loans to another country. This is counterproductive in two ways. First taxpayer money is drawn out of the economy and is spent (actually wasted) in another country and second the front-loaded austerity measures which are proven to have contractionary effects for the economy, stall the economy, thus putting it into a further recession, which allows space for speculation, with the unpleasant implications this can have.

In addition to this catastrophic practice which makes every country involved vulnerable to contamination, the bailouts themselves are ill advised and produce adverse effects. For instance the first bailout to Greece has had only negative effects on the country’s economy and has completely failed to reduce the countries unsustainable debt. In fact it has increased it. The need for a second bailout makes that even more tangible.

As for the second bailout itself that was agreed upon on the July 21 Euro summit, it is nothing more that a continuation of the same failing practices of the first bailout. Only that this time a bit of lipstick has been put on the pig’s face to make it look better. The completely inaccurate claim that the “voluntary private sector involvement” will reduce the debt burden is nothing more than a myth that is cultivated upon the false assertion of a 21% “haircut” on private creditors. The debt burden for Greece will increase not decrease. This propaganda is only used to sugar the pill for taxpayers in surplus countries like Germany.

Now the calls that are being heard by many including European Commission President, Mr. Barroso to increase the size of the EFSF to “make it more effective” is nothing more than a claim to take even more taxpayer money to pump it into the black holes of the system. The current architecture of the EFSF as well as the current approach European leaders have adopted vis a vis the crisis, renders ineffective any attempt to increase the size and scope of the EFSF since what actually currently takes place is a reshuffling, re-allocation of the problems. So the problem might move from Greece to Italy and Spain and from there to French banks or to Belgium and then to Cyprus and so on.

What we have been witnessing through all these years of the crisis and what will continue to be the case in the near future is by far the worst possible maladministration of taxpayer money. All the retroactive, ad hoc, half-measures that European leaders agree to from summit after summit are nothing more than a continuation of the channeling of taxpayer money into any of the above mentioned black holes.

This pattern will not change if the strategy to deal with the crisis is not fundamentally revised. For as long as European leaders deny the fact that the crisis is systemic and requires a system-wide solution, taxpayer money will continue to sustain these black holes and to fuel euroskepticism.