THE BOYS' BRIGADE

CNN Money reports the top trending twitter hash site in Greece, Germany, the UK, and Ireland this evening is #ThisIsACoup.

As European leaders tried to hammer out a last minute deal that would keep Greece in the euro, a large group of critics -- including many Greeks - slammed the proposed terms of a new bailout, using the #ThisIsACoup hashtag to voice their displeasure.

"I can't believe what's going on in Brussels," one user said. "These demands are insane. #ThisIsACoup"

"This Eurogroup list of demands is madness," the economist Paul Krugman wrote on his blog. "The trending hashtag ThisIsACoup is exactly right. This goes beyond harsh into pure vindictiveness, complete destruction of national sovereignty, and no hope of relief."

Killing the European Project

Let's delve further into Krugman's rant, Killing the European Project, in which he mentioned #ThisIsACoup.

Suppose you consider Tsipras an incompetent twerp. Suppose you dearly want to see Syriza out of power. Suppose, even, that you welcome the prospect of pushing those annoying Greeks out of the euro.

Even if all of that is true, this Eurogroup list of demands is madness. The trending hashtag ThisIsACoup is exactly right. This goes beyond harsh into pure vindictiveness, complete destruction of national sovereignty, and no hope of relief. It is, presumably, meant to be an offer Greece can’t accept; but even so, it’s a grotesque betrayal of everything the European project was supposed to stand for.

Can anything pull Europe back from the brink? Word is that Mario Draghi is trying to reintroduce some sanity, that Hollande is finally showing a bit of the pushback against German morality-play economics that he so signally failed to supply in the past. But much of the damage has already been done. Who will ever trust Germany’s good intentions after this?

Can Greece pull off a successful exit? Will Germany try to block a recovery? (Sorry, but that’s the kind of thing we must now ask.)

The European project — a project I have always praised and supported — has just been dealt a terrible, perhaps fatal blow. And whatever you think of Syriza, or Greece, it wasn’t the Greeks who did it.

Grotesque Demands

For a list of the grotesque demands that Krugman refers to (and I agree with him on that score), please see Tsipras' Choice: Total Capitulation or Grexit; Text of 4-Page Eurozone Demands.

Fatal Flaws

"It wasn’t the Greeks who did it," says Krugman. On that score, Krugman is correct as written.

However, it appears to me that he is blaming Germany.

If so, he is mistaken. If the eurozone project ends in failure, blame the initial architects for numerous fatal flaws.

Fatal Flaws

• No currency union without a fiscal union has ever survived, but the arrogant founders thought they could force fiscal and social convergence without letting the citizens even vote on such matters.
• The Target2 implementation was a disaster.
• The "one size fits Germany" interest rate policy of the ECB promoted fiscal insanity in club-med countries.
• The treaty requires unanimous consent on rule changes. This led to constant bickering between countries. And the more countries that joined, the more bickering there was.
• Fiscally and socially speaking, there is a world of difference between the socialists in France and the conservatives in Germany. Irreconcilable differences? It seems that way.
• Pensions, work rule , and retirement age differences make some countries vastly more productive than others.
• There are no enforcement rules on budget overloads.

Illusions

The founders thought differences would work themselves out over time. For a while, it appeared as if that could happen.

However, it was all an illusion as the great recession showed.

Unlike Krugman, I was never a supporter of the Eurozone "project" because it had too many fatal flaws to work.

And worse yet, arrogant politicians tried to force their views down constituents throats, even if they had to install puppet governments in Italy and Greece to do just that.

This "grotesque betrayal" is precisely what some of us have long predicted, and it started long ago, with the imposition of puppet governments in Greece and Italy, if not long before that.

Speece Revisited

I have written about the illusion of German virtues and Greek and Spanish vices on numerous occasions. "Speece" is my term for Greece, Spain, Portugal, and all the club-med states in trouble.

As sides form again, each pointing the finger at the other, and especially if you think one side or the other is mostly to blame, please consider From ZIRP to NIRP: Virtues of Germany vs. the Vices of Greece; What About "Speece" and Gold?

In that link I discuss the rise of extreme parties and debunk flawed notions of "risk sharing".

Risk-sharing makes Spain partially responsible for Greece and vice-versa. That may sound good, but in bad times (now), no one wants to do what it takes.

A fundamental issue is that regardless of who is to blame, bad debts do not go away.

Importantly, the Maastricht Treaty under which the eurozone was formed does not even allow risk-sharing or bailouts.

So here we are, with the conversations getting more and more heated, and the rifts wider every day.

Critical Question

In my post I ask a critical question: "Is the euro so fundamentally flawed, and tensions so high that the euro cannot possibly be saved at all?"

Critical Answer

If the answer is no, then someone needs to explains what it will take to get Germany to forgive enough debt to allow "Speece" to grow without perpetually high unemployment rates.

I believe the answer to that question is yes, as I stated on numerous occasions over the years. And if it is yes, I commented "discussion better begin soon on how to exit from this mess".

Well, it's plain to see that such discussion never started. And because of political arrogance such discussion won't start until it clear to everyone the whole mess is about to implode.

Solution

My recommended best solution is for Germany to exit the eurozone, and let the countries that want eurocrats and fiscal sharing, have eurocrats and fiscal sharing.

Who's Going to Pay?

One way or another, Germany is going to pay (by bailout, by default, or by destructive breakup). For now, Germany, the creditors, and the top politicians all refuse to admit that 100% guaranteed outcome.

Political arrogance and denial makes the destructive breakup all the more likely.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.