How the Euro Zone Would Build an Airplane

by Rodger Malcolm Mitchell, www.nofica.com

Before you read the excerpts from the following article, visualize this scenario:

The eurozone proudly builds an airplane with their own hands. They feel it’s a great achievement.

But unaccountably, they have bolted both wings to the same side of the hull. The plane won’t fly. Rather than admit they did it wrong, and move one wing to the other side of the hull, they install a gyroscope in the plane, to override the imbalance, and force it to fly.

But the gyroscope needs to be heavy — too heavy for the plane to get off the ground. So they insert a huge helium balloon in the hull to make the plane lighter. But the balloon needs to be big. It takes up so much space in the hull, there in no room for passengers. So the eurozone bolts some chairs onto the wings, but the chairs interrupt the aerodynamics.

The eurozone insists everything is O.K., but when they try to fly their plane, it wobbles so much, it almost crashes.

Insight: Greek exit could cost eurozone 100s of billions of euros
(Chicago Tribune)

Inflation Is Coming!  The World’s Financial System Is Crumbling. Here’s The Worst-Case.  From the Chicago Tribune:

Under a scenario described in German weekly Der Spiegel, the euro zone’s EFSF bailout fund could be used in the event of a Greek default to continue funding Greece’s debt obligations to the ECB.

However, this would eat into the resources of the ‘firewall’, eroding its capacity to help other euro zone states which might well need to be protected if a Greek exit sparked contagion.

An alternative scenario could see the national central banks turning to their governments to recapitalize the ECB. But going cap in hand to politicians for money they are desperately short of risks undermining the ECB’s independence.

Or, the EU, being Monetarily Sovereign, simply could pump euros into the ECB, to give to the monetarily non-sovereign euro nations.

ECB loans to Greek banks are another way the central bank is exposed but in this case, although the ECB conducts these lending operations, the funds are distributed via the national central banks and carried on their balance sheets.

A Bank of Greece financial statement showed that as of January 31 it had lent out a total of 73 billion. Berenberg Bank economist Christian Schulz said that in the event of a Greek exit these loans and most of the collateral may be converted into a new Greek currency.

“The ECB/Eurosystem would not bear the risk anymore,” he added, noting that the Bank of Greece would instead be left with the – likely devalued – loans and collateral.

Is he saying that loans to Greece, which Greece has no hope of servicing, are not a risk?

The ECB could monetize any net loss in the event of a Greek euro exit by printing money but that would come with an inflationary effect unpalatable to policymakers in Germany, the bloc’s most powerful player.

Germany still has not recovered from the trauma of the Weimar hyperinflation. Never mind that that inflation lasted only three years, could have been cured even sooner, never was repeated, and immediately preceded the greatest military buildup in history, all paid for by “printing” money — with no hyperinflation.

“If (savers in other periphery countries) see that Greek savers have seen their euro savings overnight being converted into drachma, which could depreciate by 50-70 percent, then it would be a fairly simple hedge strategy for them to take out some of their savings and put them into Luxembourg, or pounds sterling, or Swiss francs,” said Bosomworth.

First, there is nothing to say the drachma will depreciate.  Second, if the drachma does depreciate, Greece’s exports will soar and tourists will flock there.  Unemployment will disappear and Greece will become one of Europe’s wealthy nations.

That’s the real reason for the EU’s concern — having the world see what a failed plan the euro was.

ECB President Mario Draghi said on Wednesday that “our strong preference is that Greece will continue to stay in the euro zone”.

Translation: If the euro disappears, I, Draghi, will lose my job.

“What they can do is try to prevent contagion – where they have a very significant role – and they will probably also try to convince participants on all sides to keep Greece in the euro area,” said Citigroup economist Juergen Michels.”

Next step the eurozone takes: Attach their plane to an Atlas rocket and shoot it into the stratosphere, from where it can glide down — but the lower pressure causes the helium balloon to inflate, splitting the hull, so the gyroscope falls out, causing the plane to crash, killing all the passengers who still are sitting on the wings.

My advice to passengers: Get off that plane while you still can.

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Opinion blogs on the Eurozone and Greece