How Syria Will Create the United States of Europe

Europe is under attack, an out and out invasion which if control  remedy is not applied soon the difficult choice of  using bloody hard power or surrender is presented.  I am not going to talk about the morality involving the true inequality of income in the world, which is the $5 a day folks in areas of $5,000 GDP per capita versus the $100 per day folks in areas of $40,000 GDP per capita.  Personally I think there should be no immigration or emigration controls and let people go where they wish and replace borders with clear “rule of law” of that of the specific locales.  But that is me and unlikely to be ever considered by the EU.

But the economic disparity which is right now only separated by the distance between Turkey and Kos , with Kos easily seen  from Turkey on a clear day, is the cause of the current so called “refugee” crisis in Europe.  While a relatively small amount of Syrians fleeing for their lives from Assad, ISIS or the “good guys” moderates do exist, they were merely the pathfinders and showed the way and how defenseless Europe is to the migration. Almost all the current migrant waves are looking to better their lot economically - and why not.

If you can land in Europe, especially Greece, you are in Europe for good.

There is not a father or mother in Africa and the entire Middle East and even South Central Asia who if they could afford the transit would not gather their children and strike out for Europe.  And thus small babies are washed ashore in Turkey.  Whats more it is the absence of law, of the state, which is allowing these parents to commit manslaughter on their own family as once they return from a failed attempt the state they originate from or the Turkish  court system do not prosecute them.  No one is gathering these people up at gunpoint and marching them into the sea, they are eagerly finding smugglers and paying the costs freely.  These are not “human trafficers ” providing transit but they are committing man slaughter as well.  But there is no court, no prosecuting authority, and if their heart is black enough they will accept the commission.

How many potential economic migrants are there?  If it is accepted that this is an economic migration the number is incredible – about 100 million or more and will reach 20 million to 30 million quickly if nothing is done.

Why is Europe so vulnerable?

Because of Germany and the arrested development of the formation of the United States of Europe. The migrant crisis is showing a cross roads, where Europe allows Germany to continue to dominate Europe and basically loot it with Germany quite willing to accept the cost if the migrants to keep that power, or Germany is quickly subsumed into a greater Europe, surrenders is hegemony and Europe starting with the Euro Zone becomes a federation.

Germany was onboard as was all of Europe – but for the Gaullist wing of France – prior to Germany reunification.  The program was the Monnet Plan, where periodic crisis would force Europe into further unity given that swaths of Europe were “straight jacketed” into a series of treaties that insist on only one direction.  The Monnet Plan would be allowed by the USA, who still occupies Europe via NATO and via a remaining occupying force, as it would  “keep the Russians out and the Germans down”.  And Germany, at first too feeble but to go along and then later with East Germany held as a hostage for compliance, was a member  participant of the Monnet Plan.  The creation of the Euro and Maastricht start of the treaties to create trans-Europe institutions such as the ECJ and the ECB all were headed, as agreed to by all – the “United States of Europe”.  The USE was to be a sovereign country with  not only all the sovereign institutions such as the ECJ and the ECB but also an executive and representative bi-cameral parliament.  That would lead to a USE hard power, a navy, army, air force and a coast guard.  But there were still crises to come to add the executive and the  representational  parliament.  So a ad hoc system of bureaucracy, competencies, and the EC providing the executive function.  Later, as complexity of  finance developed, the EuroGroup was created composed of the finance ministers.  Power for this adhoc grouping was confederate based on GDP size and to a lesser degree population. So power started to evolve to Germany.

German re-unification before the launch of the Euro ended the “hostage power” to keep Germany “down” and what’s more allowed Germany to convert DM to the Euro had very advantageous rates.  Then with the re-emergence of Gaullist in France, Germany struck a deal with France to end the Monnet Plan and jointly “rule” Europe.  There was no need for hard power as the USA provided that, and Germany kept the “guilt” over WW II to shred what was their peace terms for their surrender – the Monnet Plan.  Since the USA did the ugly tough stuff, Germany and France, with the balance of power  going more and more to Germany,  could simply start to loot the rest of Europe with the massively favorable internal terms of trade.  Other nations similar to Germany like Netherlands were cut into the deal.

What resulted was Germany achieved more economically with the current system than they did in WW II.

But now reality bites.  The USA hard power is there to protect American interests, certainly not to perform border duty or provide a coast guard.  The true war refugees showed the desperate poor how easy it was to get to Europe.  And a crisis now hits Europe unlike any of the others which cannot be handled with a confederacy but requires a federation.  Germany is trying to keep the confederate hegemon and claiming a sanctimonious high road is willing to accept up to 800,000 refugees but with the small print being the German controlled EC will dispense the majority of that around all of Europe.  Not considering how this “niceness” of Germany will double then triple then quadruple the migrant flow and there by kill scores of three year olds, mothers, children and fathers, it is obvious the German claims to “nice” is a ruse.  If it were real Germany would be establishing beachside processing in Turkey or all launch points for the migrants and then provide secure transportation to Germany.  They of course are doing anything but that rescue.   Germany wants them to hit the seas in puny blowup almost toy boats or scramble through Hungarian razor wire.

So this ruse by Germany won’t work, and in fact gas the opposite effect and will induce a flood of ever greater migrants who now expect a welcoming Germany.  No doubt  ISIS and al Quada  operatives are in the flow already with more to come.  The debacle will become apparent, perhaps with a massacre of thousands by close to fascist Hungarians, or terrorist attack in Europe in support of ISIS, and thousands upon thousands drowned.

Obama won’t take action and after the poor way Europe used the USA in Libya and the lack of any real support against Assad and ISIS – Obama will just let Europe hang on this.  The USA knows where the Monnet Plan  will take Europe, a slightly large populace just as prosperous as the USA with a matching nuclear armed hard power.  So the USA will allow this crisis to carry on as Germany wants.   The “Obama Doctrine” offered in Cairo by Obama  is showing its results – death and chaos – and now Assad does look like a more useful and beneficial partner to Europe and the USA.  The Bush Doctrine was the right plan and would have prevented all of this from occurring, and if Obama had not surrendered Iraq to chaos and now ISIS, none of this would be happening.

But this is Europe’s crisis now.

Germany will work on keeping power, they will try as hard as they can to prevent Europe returning to the Monnet Plan, so many will die as they  do so until the slaughter is of such a nature Germany relents.  When that happens, and it will be terrible in the process, Europe will be shaken to its core.  The current shredding of the Schengen Convention will make the confederacy with German hegemony exposed for the non-democratic construct that it truly is, an occupation of the rest of Europe by Germany and their cronies.  The need for a functioning federal Europe will be obvious and the Europeans will insist that it is democratic.  Along the way Greece and Italy will realize they can call Germany’s bluff and will do what Germany should  if it were sincere – they will arrange safe transit and passage for hundreds of thousands form Africa and the Middle East but then dispatch them to Germany for processing.

Europe will not take even another 100,000 migrants.

So the country of Europe will be formed, perhaps not being called so but defined by its apparatus and institutions.  First a coast guard will be formed to either prevent the migration (as Australia is doing now) or to provide rescue and security.  But that will not slow the flow so a trans-European marine force will go and occupy areas that the migrants launch from or for areas like Turkey it will be a a police action in coordination with the local government.  But in the end the only real remedy is to  re-establish the state of Syria and other areas so as they can provide their own policing and social services and stop the migration.  This will require a united Europe common force – an army and to support the army an air force and navy.

A crisis that even the brilliant Monnet could not have possibly foreseen may  cause the final step in the creation of the United States of Europe.

Best Weekly Commentary Ever

“It was also pointed out that a prompt start to normalization would likely convey the Committee’s confidence in prospects for the economy.”…..

The July 28-29 2015 FOMC Minutes

…. was in the minutes of the July FOMC meeting, released Wednesday.  We feel this is a most telling statement and seemed to be shared by many of the participants at the meeting.  While it  was immediately thought by the markets that the minutes showed a Fed that was still stubbornly “dovish”, ready to wait for – well whenever,  before ending the adherence to Zero Interest Rate Policy (ZIRP), a growing group in the Federal Reserve is becoming impatient.   The market is perceiving the Fed as enacting a very poor over-acted financial “Hamlet” with “to be or not to be” replaced by “to ZIRP or not to ZIRP”, except the phrase is heard only once in Hamlet, now being repeated over and over and over……..

So the Goldilocks trade, where the market perceives a long term period of ultimate liquidity as the US economy shows greater and greater strength, is coming off,  and the market is not waiting for the above play to end but is arranging business as if rates were already normalized and ZIRP in the review mirror.

This could leave the Fed with a fierce tactical challenge for if the market has lost patience and gone on without the Fed leadership, once the Fed does normalize they will find they have to raise quicker and harsher than they are ponderously planning on now.  This means the current game plan and stately controlled manner of the Fed is thrown out the window as the Fed scrambles to regain “leadership”.  Not getting into what that means for rates but to note that rates will be higher than they are now, it does make it a fait accompli that the risk and drama of  sudden lurching acts by the Fed to regain that leadership will end with greatly increased risk (volatility) in all assets.

We think this pricing of anticipated  greatly increased volatility is what has been happening over the last week with the large drop in the SP500.  While most stress only one or two factors (DIS earnings as content goes “over the top” bypassing the commercial channels of ESPN or other commercial TV,  Walmart who showed they weren’t kidding when they said earlier this year that they were raising wages (wage inflation), China  continually deteriorating authoritarian designed market and economic structure,  and residual of Greece) which are valid but not focused on the main event.  The Fed and what is starting to seem to be financial dithering, is at the heart of this down trade.

Economic data continued to show the very strong robust strength to the US economy with strong home sales, real earnings and especially unemployment claims data which is showing such strength it is off the grid in terms of comparison to any prior period.  Yet  all survey data which is based on opinion or very small samples to deduce very large populace continued to be lack luster such as the NY Federal Reserve “Empire State” survey of business conditions or the “Business Leaders” survey.  The Fed’s dovish concern over the economy is almost solely based upon the survey based input, and now they are willfully ignoring the census based data.

SP500 was down 72 points from last Friday’s close of 2091 trading at 2018 at the time of this writing.  While Consumer Discretionary was given as the leader, as in most large declines the losses were fairly evenly distributed with only high dividend or utilities not trading down as much.  Unlike previous down trades in equities, US Treasurys did not trade up as much as other equity declines and the US Treasury 2 year  is now at still recently high levels of .65%, down 5 basis points (.05%) from the .70% level.  When the market traded down for Greece, the US Treasury 2 year traded down to a low of .50%.  Our read is the US treasury 2 year is priced anticipating near immediate end of ZIRP.

BBBBBBB, after a brief drop in the weights immediately after Greece, has been maintaining our highest cash weights throughout this downslide.  This was not so much in anticipating a drop in equity levels, but rather in anticipating the large increase in volatility that has been occurring and will increase as markets reorganize given the end of ZIRP.  Our cash weights for our model portfolio have been 22%.  We do not see value in fixed income and out fixed income is still short maturity corporates. Equity sector weights are still financials, consumer discretion, and some health and tech.

We are still waiting for the “fat lady to sing” which will be the Federal Reserve normalization of rates, but since we do not think this normalization will behave and act to the Fed’s script, we will carefully assess and not re-deploy fully weighted into equity until we think all the increased volatility has been priced. But it should be kept always in the forefront that the reason that will force or prompt the Federal Reserve rate rise is the ever increasing strong robust strength to the US economy.  This makes us very constructive for the long run on US equity which will likely be the bell ringing asset for the next decade, barring any exogenous foreign shocks.

Claims Redux

The writing was on the wall a long time ago for the claims data released this morning.  Sorta cute folks are "discovering" claims data now when its key importance started around this time July 2012.  Claims data then was the most important key input for Bernanke (along with how it was picked up in the new "spider graph" the Atlanta Fed started doing) such that he started the Fed towards a traditional tightening phase, ending QE and setting the stage for the end of ZIRP.  He was cut off at the knees by the politicos like Bullard, Yellen, and English and the "true believers" at the Chicago, Minneapolis, and Boston Fed.  So the end of QE became a "taper" and what I think was to be the first rise in Dec 2013.  Was all inspired by claims.  And in particular claims over the July auto refit week as 2012 was the first year many of the auto and auto parts plants did not shut down as auto sales started their surge towards 16MM annual sales rate.

While tech and finance will end  the USA biz cycle - the biz cycle recovery is accomplished by autos and housing.  This makes the July refit period of great importance in a recovery.

The claims data carried on after the 2012 refit surge, and as BLS calibrated the monthly surveys to the claims data, we had the early fall UER  surge through 7% in UER that left Jack Welch sputtering (he was right, the data was being manipulated, just he had the sign wrong, it should have dropped all the way towards 6% then.

The babble of the power play, to wrestle the Fed from economic data carried on, deeply entrenched by the time of Bernanke retirement.  I believe the BLS was coordinating with this group at the Fed  to put a drag in improving the monthly data.  BLS also had a huge problem as they capped UER at 10% when it should have gone on towards 12% or even 13%, so there were about 2 MM Labor Force reduction made in 2009 to 2010 that was being carried like a bad trade in the drawer.  Pity that, as I think that was the main reason the Democrats lost Congress to the GOP midterm as the economy was already in solid shape but depicted by the Fed and others as still in dire shape.  Greece Crisis I was also covering the huge US econ improvement as well as a completely contrived US budget crisis. Obama was now full throttle in one of the most sincere austerity movement of any POTUS prior and considering how little time had passed since the worst solvency crisis in a century, was a bizarre policy.  This is still Obama's economic policy, just he is lightening up on the brakes.

So the end was with Bernanke stifled, Obama's austerity, Greece, the fogging of the monthly data by the BLS for whatever reason, and new GOP dominance of Congress, the massively improving status of the US econ and the labor market was missed.

This became even more apparent in 2014 as the 1stQ weather hit immediately threw cold water on the bulls and then the roar of 2nd Q with obvious significant inflation showing the Phillips Curve is still with us and is axiomatic.   But then oil was crushed and the last phase of the "currency war" kicked in, especially German influence to drop the Euro towards parity with the dollar so they can take their mercantalist pillaging of Greece et al (there wasnt anymore to be had for Germany anyway as unemployment rose to high 20% in those countries), and the BLS kept the bad trade in the drawer, though they did manage to get 1MM or so of the "error" back into the labor force. This meant that after what appeared to be a flash in 2nd Q 2014, the view was the market returned to the secular stagnation weak labor market meme that was essential to keeping your macro job and for the Fed to maintain power.  The Fed with the import price pressure and PPI pressure on CPI and PCE was able to keep the disinflation, low inflation thesis alive.  This in turn kept Congress at bay and allowed the Fed to keep their extraordinary powers that were not even seen by most as they are now expressed in "macro-prudential" policy.  So Yellen was able to deflect Congressional challenges for the Fed to maintain their massive new found power, which are most dangerously poised in  FRAT, HR 5018, which is to force the Fed to return to their own defined "Taylor Rule.  Later, in this year, John Taylor noted that the bill is always in the forefront of Yellen's mind when dealing with Congress.

So all through 2014, but for the "hiccup in 2nd Q"  the weird political mixture that requires a bearish view on the USA econ, especially labor, was able to be maintained.

Then into 2015, a repeat of the 1st Q weather occurred, this time with the GDP of Boston being wiped out of all data for months, allowed this bearish momentum to continue.

Until now, now the obviousness of the claims data is showing how ludicrous the bear US econ story is, not just today - but if you had paid attention to the evolving claims data has been the case since 2012, as described above.  This has not been the only data showing the extremely strong US econ since 2012.  Auto sales, consumer credit, retail sales, tax receipts and now housing were also going at full throttle.

But the clearest depiction is  from claims data.  I have gone on quite a bit on the utility of claims data, just look at prior posts on this blog from 2012 onward.  The latest post was last week. This is perhaps the best time in the year where claims data has most utility as it is the 2 weeks where autos and other manufacturers close down operations, lay off workers and do refits.  This is the part of the US economy which has the most "Keynesian Multiple".   I use only non seasonal data, as the worst of the crisis hit took place in Jan and July 2009 and Jan 2010.  This was registered as mostly large "seasonals" which either was a deliberate attempt to keep claims data aligned with the capped at 10% UER.  So the seasonal data, if you are seeking trends, is just about useless.

The more important data is in the continuing claims, but it is lagged one week behind initial claims so this AM it was for Week 28, while initial claims is at the end of the refit week Week 29.  What initial claims shows it that there was almost no auto refit shutdowns this year, and what bears watching is if continuing claims close in on 2.1 MM and drop insured UER to 1.5%.  But as you can see, similar auto strength is shown in 2012 to 2014 shut downs as well.  The dichotomy between claims data and the monthly survey based employment is so egregious that this will force the Fed to give up on looking to employment as a factor to keep ZIRP.  ZIRP should have ended when I think Bernanke wanted to in 2013, certainly it should have ended by 2014.  Claims data is crystal on that.  The size of how high Fed Funds will go in the first quarter after the end of ZIRP is indicative of how far out of whack monthly survey data is from claims data.  When monthly data re-calibrates to claims, the UER will be in the low 4% area.  The Fed Funds then will certainly "pop" well over 1% very quickly, if not over 2%, once this correction is applied.  That is why claims data is not only of great utility, but essential at this point.

Claims Data During Auto Refit (Week 28)

The claims data released this morning were extraordinary.

The very strong fully recovered labor market is still evident (and has been so for over  a year now), but this week, the 28th in the year, is the week that auto refits take place and auto and auto parts layoff their workforce for 2 weeks.  But the non seasonally adjusted, here mapped out in colors, with the year in the x and the week in the y shows, shows - by scanning down the week 28 row since 1992 - that this auto refit is basically not occurring.   This is shown by the dark brown color versus all other boxes being lighter brown or white (I cap the data at 400,000 or lower which provides a more nuanced color gradient.

This shows a very healthy labor market as well as strong durable goods sales (autos), and increase in durable goods inventories (again autos).  This should add .2 to ,3 to 3rd Q GDP and shows momentum from 2nd Q GDP which suggests it may be a surprise on the upside and then readjusted upwards.  3rd Q GDP may very well top 3%.

 Continuing Claims, those who have started drawing state unemployment insurance and are continuing claims shows the continued very strong robust labor status, but the continuing claims is lagged by one week to the initial claims which are concurrent.  So next weeks continuing claims will be of interest to see if they match the above view on initial claims.

The above claims data coordinates well with the JOLTS data, but is completely out of whack with monthly employment data.  Since claims data is an all encompassing census and not a sample based survey like the monthly employment, it is reasonable to consider claims data as more useful and to not see useful accuracy in the monthly data.  This is why the BLS outlines that they will adjust and calibrate the monthly data to the accurate claims data, for whatever reason the BLS is not doing so in this business cycle while they have done so in every business cycle prior.

The True Nature of the Greek Crisis – How it will All End; Germany is Closing in on Their Own Default

If you recall my thesis in 2011, I sketched Europe as a constitutional crisis  and not related to finance, though most then  saw Europe  as a financial problem contained in units of the separate EZ states.  They still do – everyone still does.

But I was right , and as usual for my forecasts, since they  are usually dependent on a political read rather than a micro-economic  read,  I have had  better foresight.  But  I also have a lack of timing as I am not very  involved with the noise of the markets.  By noise I mean the quarter to quarter swings.   I have found the important market moves occur on a seven to ten year cycle based on  a  political cycle (two terms for POTUS time usually).

So with the same qualified  foresight I showed  in 2011,  I wish to present my current view on Europe.

I am confident I have “nailed” the current situation.

Basically, I hold the same view as I had in 2010.  Europe is still a constitutional crisis and has little if nothing to do with Greek debt. 

Greece is immediately very important, but as most have quickly deduced it is “only” a problem as the entire Greek debt is  a bit under 3% of the Euro area.  So Greece is only a tactical situation now for most, with focus on the terms of the deal.  Greece ha d no choice but to surrender as Germany was ready to plunge the country into some Lutheran hell of original sin, backed by the other moralist Finland.  This not good for the Greeks, they will be beaten into submission and become a debt colony of Germany.  But is quickly being priced as a small factor for US and world markets in general.  At the time of this writing the SP500 was traded up 70 points to 2107, a large move, since Weds lows last week.

The more useful long term analysis would be at first curiosity as to why Germany was so adamant and so belligerent for what is really a small problem.  How they deployed the extra-EU Treaties institution to do the job – the Eurogroup – so as to avoid conflict with  and control France and Italy.  Why did Germany find itself at odds with France.  Why the debate was contained for 5  months in the Eurogroup with what Yanis Varoufakis called a plot. - so that in the end Greece faced a pre-planned outcome imposed upon them.  The above hyper link to Varoufakis interview  is a must read.  When reading Varoufakis it should be noted that he has the historical read of a Marxist – ie brilliant. [ It is always best to use a Marxist to tell you where you are and how you got there, but then drop him and replace him with a Kissinger or a Fukuyama or a Keegan for forward for policy planning then a Nixon for implementation.]

Via  answering  the above questions the true nature of the European crisis  becomes clear.

Germany is facing, and  will experience, if nothing is done, default. 

Germany has built its own demise in typical Germanic fashion, only it was via  trade locked into the de facto gold standard of the Euro (for all those in the EZ) ,  and not armies that have built the " Fourth Reich" rise and will  assure the fall of Germany in the end. 

Trade economics are relatively straight forward, one of the first economics defined as far back as Hobson and Ricardo.   Trade economics uses a  ledger, a Pacioli double entry accounting approach.  In  international trade if one nation sells something  to another,  the seller needs to settle “money on the barrel”.  If the two trading counterparty nations are in balance, with no chronic competitive imbalance in the terms of trade, then the trade processing ends, and after short term trade financing is paid down, both countries current account is unchanged.  All common sense and easily described by Ricardo. 

But if one country enters into trade with another that has  chronic competitive advantages in terms of  trade, usually because of large constant better  factors of production like labor costs and more often than not a “rigged” currency,  there are no comparative advantages. The country with the chronic competitive advantage not only sets the price, sells the good with one-way trading, but also finances the trade.  If the rigged currency levels can  be maintained, as well as the advantages in a lower cost of labor, with large  constant savings rate,  it is inevitable that the exporting country not only exports the  trade goods, but will inevitably finance the trade flow via debt from their larger savings rate,  and has ever increasing positive current account as well as a chronic trade surplus for the exporter and chronic trade deficit for the importer as well as mounting current account deficit financed by ever accumulating debt balance to the exporter.  Hobson described this centuries ago and provided its name: “mercantilism”.

The mercantalist colonial empire requires hard power, or some means of coercion and enforcement to keep the importer in thrall. Or the debt simply defaults sooner or later.

If the mercantalist does  not have the ability to enforce or coerce the importer into line, then what is a benefit and empowerment turns into a cancer and will force an overturn of the mercantilist in a sudden cusp movement – a very bad week for the exporter. 

A good rule of thumb is that without enforcement and ability to maintain a  long term colonialization of the importer, the accumulated trade surplus in the accumulated current account will be lost  or be devalued an amount  approximately  equal to whatever was the trade advantage.  Then  as the importer balks, and refuses servicing and repayment of debt, or simply cannot do so as the only rebalancing available is the raising of competiveness via  mass unemployment, weakens the economy such that the debt cannot be serviced .  Or the importer finds better terms away.  Giving the precedent that this cycle almost always occurs, it would be better for the exporter to look forward and manage the debtor, always keeping the importer in good health, and certainly never let the importer get to the point where there is nothing to lose and such that they  revolt and default. This is accomplished by equalization payments, or transfer payments or mass rebalancing like the Marshall Plan of which the largest recipient was Germany itself.

It is not clear if Germany knows they are in this situation with Greece, they may indeed believe in the clap-trap of Schaeuble.  What made Germany’s mercantilist status is not readily apparent and by being so may even have fooled Germany.  That Germany believes Greece arrived at their current status by choice.   Even the great Paul Krugman who one his Nobel Prize in trade economics, misses that the Greek debt crisis is a classic mercantalist trade imbalance problem. 

Germany, Krugman and others  may  not even  be aware of the  German  policy and factors for intra-EZ trade for the last 15 years, as it was cloaked under  the Euro. 

German  labor reforms so as to reunite with  East Germany, the cheapening of the DM value by absorbing the Ost Mark at clearly off  the market rates for conversion into DM, and then the entry into the Euro at a very cheap 2 DM per Euro conversion – all these factors set up German to pillage almost all their EZ partners  trade account. 

Germany insisted on no transfer or equalization payments, and had Karlsruhe enshrine that into the German Constitution.  These German terms of trade, and the inability of any EZ  trade deficit partner to rebalance to Germany but for unemployment, and then Germany – up until 2010 – is the cause of the crisis.  In the USA if one state has such  adverse pressure, folks pack up the Budget one-way rental truck and move to the other area in the USA which is doing better, as well as about 20% of the USA budget going to equalization and transfer payments.  In Europe there is no mass internal migration and there is now no currency, and until 2010 one could add to the debt from Germany to finance the next years trade imbalance, so massive imbalances have built with Germany since the Euro was launched and especially since Greece joined the Euro.  The impact on the comparative GDP per capita: 

And the rampage and damage that Germany is imposing on the EZ in comparative unemployment rate:

Given that the only way rebalance is to force unemployment, this ends in a perverse cycle as the country gets weaker  and  unlikely to repay the debt owed.

The level of German trade surplus growth is massive, and until recently most of that on exports to fellow EZ members.  The Germans, by insisting that there are no transfer or equalization payments, and the confederate nature of the Deutsche Bundesbanke  and to a lesser degree the Bank of France and the Bank of England, have the internal payment system of Europe to “firewall” the credit of each of the EZ country’s central bank .  As debits and payments are made in the interbank system, they move to the member country’s central bank and then to the ECB balance sheet for the credit or debit of the respective country’s central bank account. The US has a similar system between the regional Federal Reserve Bank, but the accounts don’t mount as imbalances develop between the region s, but are cleared each day.  In the EZ system they are not cleared but accumulate.  The system is called TARGET2.  By monitoring the TARGET2 accumulated balances at the ECB for each EZ country, an explicit and dynamic picture of the massive intra-EZ trade imbalances are obvious.

The changes in TARGET2 balances over the years compared to the change in the current account balances, showing the TARGET2 accumulation and change is from trade.  Germany is the obvious standout and the accumulated surplus is more or less offset by the changes in the other member EZ deficits:

The levels of the TARGET2 accounts then is a quick robust way to track they accumulated debt financing for the trade, as all deficit trade balance countries must finance by borrowing. 

The deficit levels, or accumulated payments owed to Germany and to a lesser degree Luxembourg (tax shelters for Dutch, German and French companies for the most part) , when considered as an accurate measurement of the growing trade balance in the EZ becomes telling.  First, Greece is a very small part of this “debt”, so why the vigorous hammering by Germany and the attempt to remove Greece from the Euro.   It is because Greece isn’t the problem Germany faces.  The real problem is if all the trade deficit financing becomes one problem – if Italy is packaged in with Spain.  But especially Spain, as Spain and Italy have not accepted the first bailout as Greece did in 2012, and their debt balances are not with a sovereign Germany alongside IMF financing, but are still with German financial institutions either directly or through Spanish and Italian banks.  Then if the unemployment adjustments Germany has imposed upon Spain and to a lesser degree Italy are added with the now radicalized Greek unemployment a mass of people appear on the scene that cannot be segmented into individual countries and overpowered as Germany is doing now.  So Germany is smashing Greece now so as to attempt to prevent that aggregation of trade debt financing. 

All of this could have been avoided if the Jean Monnet plan for the evolution towards a “United States of Europe” had occurred, instead of being interrupted post-Kohl.  It is cloudy as to why, but it seems all roads lead to Schroeder and the reunification of Germany has swung focus of Germany away from the EU and towards East Germany, but for the annoying Poles.  Germany is creeping towards association with Russia, whatever the reason.

When I presented this  to DC folks in 2011, was the only one of my group who saw that the crisis from 2010 onwards was solely constitutional.  All of my group dismissed my thoughts and went onwards into credit, flows, debt and financing.  What surprised me at the time, and I did not understand the importance, was the  staff we presented to all agreed with my views with an almost casual “off course”, all saw it as a political and constitutional problem.  Then they asked our group our views on when unemployment adjustment would cause civil strife and violence.  All of the NYers were surprised at the question and of course had no expertise in answering, so we dropped that question and drove on.  I know realize that was the main point, that we were there not so much to present new information, but to confirm existing  views.  That the unsaid view of the USA was to not encourage or insist on a constitutional remedy to Europe, but to monitor where the boundary was for mas civil unrest and only step in at that point.  That is suited the USA to keep Europe a weak confederacy under a short term grasping Germany.  But, since I had not realized the above until recently, I can assume that the audience was not watching the Hobson-Ricardo nature if the building trade deficit financing but were accepting the moralistic character view of the Greeks making these choices and self imposing their own problem, along with the rest of the periphery. 

But the ability to ride that edge and manage Europe towards a somewhat chaotic force muddling through are over, unless the USA desires the default of not Greece, but of Germany and possibly France as well.  NATO stuff.

It is useful to very briefly reconsider the Ricardo-Hobson nature of the current crisis.  It is not due to specific national traits to work and savings of tax scoff law, it is the Pacioli immutable reality that in a closed system like that the EZ became, without any adjustments of that imbalance available, the country with high savings ,low cost of labor and high productivity will “invest” in low saving if not deficit countries.  If the cost of the trade goods continues to be inefficient, the trade balances will result with the high saving exporter ever increasing  the debt financing.  They will keep doing this until the unemployment rate, in a democracy, results in an economy that can never repay the debt and will refuse to service it.  The adjustment via unemployment is insufficient to rebalance so the debt is violently repriced to finish the rebalancing required via default.

Looking at the TARGET2  balances, and considering past sovereign default, 60% of the TARGET2 level will be how much Germany will face in default – about 400 billion.  On a per GDP level, this is about double what the USA experienced in the 2008 mortgage default solvency crisis.

Germany will be ruined if nothing is done.

Greece is not the problem.  The problem will be  and is now Germany.

What can be done also provides prescience.

When a sovereign goes into default they either become excluded from the globalized financial system or they have a restructuring from the IMF or the US hegemon.  The amount of 400 billion for only Germany alongside with the equal amount  required for the rest of the EZ (remember the books will balance) is beyond the IMF.  And this will happen  quickly, especially if Germany keeps fighting this outcome.  And the USA will not provide a bond swap for that amount either, as the 700 billion ARRA 09 funding is still being dealt with along with the cost of security as ISIL and other problems flair.   When this happens Putin will likely take full advantage of the situation and will encourage many areas “hot spots” as well as continue with their own goals in the Ukraine and well as Latvia.  Russia will sue this situation to come and “aid” Germany, as well as Greece.  It would challenge the continuation of NATO.

What Germany will do, if this unfolds, will seek close cooperation of all the EZ and build the entity which they could swap their debt with and remedy the crisis.  The only entity to do that would be a “United States of Europe” where a Eurobond is swapped for all the defaulting sovereign debt.  That financing and bond issuance would require a federal financial structure from taxation to setting policy to paying all commonwealth enterprise.  As Hamilton did with the US retirement of the colonies debt with newly issued US Treasurys in 1789, it will launch the United States apparatus.   Unless all of the EZ wished to grant a dictatorial  authority to Germany to run this new country and manage debt and taxation, all the usual federal democratic apparatus will appear.  This would be easy to make as all of the EZ would be facing the problems Greece is facing now, and quickly the corporatist German hegemony partnership can be swapped into a federal structure.  The ECJ would be activated, as would the population defined European parliament.  The Euro Commission becomes the departmental bureaucracy which would be under an executive that is directly elected that replaces the Euro Council.  To avoid the problems of a confederacy rather than a federation, the Euro Council would either convert to an upper chamber based upon state, and the first ministers return home as governors.

This is what will happen and is the only way I can see Europe, and especially Germany being ruined.  The question as to whether or not the occupation of Europe by the USA ends or begins a wind down, but NATO would continue as Germany is turned away from Russia and back to being one amongst equals in Europe, and a European common force quickly becomes a full equal to the USA.  Which is the end results which I think motivated the Agency forward looking planners wished to forestall. 

I am constantly increasing the regard I have for Jean Monnet as the above is perhaps the only way the United States of Europe is created.  I will go further, I think this will create and finish the Jean Monnet plan, reviving it from the ashes of the Schroeder and  German re-unification destruction of the Monnet plan.  I think it is now time the USA swing back to supporting and encouraging the creation of the United States of Europe.  Once this is achieved all the debt crisis in Europe will disappear as quickly as the debt crisis in the newly created United States of America with Hamilton’s “Assumption of the Debt” in 1789.

Then over a suitable time the USA must withdraw from Europe, allow a European ‘Monroe Doctrine” develop,  and accept from time to time a United States of Europe will have serious differences with the United States.  But that outcome, even with the risk of a bipolar world as the United States of Europe would be every bit the equal in power to the USA, would be a more secure world for the United States in the long run, stop Putin’s vain-glorious nostalgia, and balance the load to contain China.  In the long wrong a united federal republic in Europe would lead to a secure and stable world for democracy and would be well down to the road of the “end of history”.  Fukuyama was right. 

What Greece Must Do Immediately

...so as to make today a great day for all of Europe.

Immediately, Greece must shift the focus from so called, and insultingly called, “Grexit” to defining the forum and the authority of the forum to discuss the Greece debt.   The debt is by common sense never to be paid back and is in fact a fiction, it is a trade imbalance and then an emergency intervention as the world entered into the ‘Great Recession”.  Much of it if not most will be forgiven – call it by any name one wishes.  But the forum to date is clearly inadequate for the negotiating of this so called debt.  A forum must be found or designed that has legitimate authority to define review and then deliberate and then end this crisis.

Greece upon itself is similar  to Rhode Island  in the 1780s for the USA, especially the first Secretary of the Treasury, Alexander Hamilton.  It was almost  an island like Cyprus,  of smugglers, tax avoiders, and bankruptcy schemes.  But Rhode Island went down in the end being integral in empowering Hamilton and showing the nation the need for centralized treasury and more importantly centralized federal oversight and policing (creating the US Coast Guard , for one).  So Rhode Island characters were in the end more useful to the nation than the most stalwart rich North Carolina planter.  And it should not be lost, that to build the USA, the first step was Hamilton forgot all the state debt and aggregated it into US Treasury debt.

Greece must swing the focus on federalism, yes they have serious problems, and those problems overwhelm the existing civic power of Greece.  A EZ federal tax authority is required.  Greece debt must be swapped, just as Argentinian and other countries debt was wrapped around US Treasury corpus in the late 1980s by another Secretary of the Treasury, James Brady.  And then duties Greece now has for policing the common border of the EZ, especially against the most serious problem of refugees, must be delegated to a all EZ naval and para-military force.  The same with Greece obligation to NATO.  In short, it is impossible for Greece to do its duty to the EU and to NATO without federal institutions where it is only a small part of just as Arkansas implicit share of the US Navy or the IRS.

Greece must force the discussion to rejuvenation and repair of the system which was and is still completely flawed, and to assume an equitable duty in that repair and then ongoing capability.

To do so that requires a European federal republic, while Europe seems strangely complicit in allowing Germany  assume the title of running the entire European Treasury, I think they will realize the advantage in that  when the Greek remedy and then ongoing prosperity requires a para-military if not military capability and Europe wide policing, starting with taxation.

Europe has been avoiding this requirement, burying their heads in sand and letting the USA provide the  hard power, so that they can carry on eating at either the corporatist or German trough like pigs.  Even those countries most damaged by German intra-EZ mercantilism, support Germany “super votes” and allow them to run the EC – I guess because it provides sinecures (board membership on GAZPPROM) and fine meals Comme Chez Soi in Brussels.  Or their leading industries get to go along like volunteer  financial shock troops alongside German business as they loot and conquer.

But a popular and indisputable direct democracy, not just of the Marxist Syriza, but a super majority of all Greeks, has shown the falsehood to all of this by voting as a united people OXI.

Greece must now swing hard to defining the platform, even ignoring the debt itself for the time being.

Greece must do the following:

      1) Organize a pan-EZ block of all people with the same problem of German intra-EZ mercantilism but with no mechanism to re-balance the results of mercantilism – no power to force terms, no transfer payments, and most importantly no currency to devalue to regain competitive terms a la Ricardo.  The only re-balancing provided to regain competitive export ability, which Germany insists upon, is mass shock unemployment .   Formal alliance with Podemos, is required and Rojay must go.  It is not out fo the question to split the EC super votes and bring Hollande in the alliance as well as Renzi – if not that go to the traditional left of Italy and France.

       2)  Immediately sue the ECB, the IMF and Germany for various cases – there will be no scarcity in finding cases that will be certified – to be tried in the ECJ.  The ECJ is federalists as in there is not weights for justices given to Germany and England and France and even Spain or Italy.  It will take and must take by the Treaties a pan-EZ view where every country has the same weight.  Europe needs a balance of powers and an arbitrator for defining the following, the ECJ muct be activated.

   3) Greece must insist that a counterparty to the ECB be defined and is the peer of the ECJ and the ECB – a pan-EZ “treasury”, a “Resolution Trust Corporation “ (RTC) like structure that solves the imbalance debt crisis with the same mandate as that granted the US savings and loan crisis RTC.  It would be federalist and have a board that is not super weighted as per GDP but federalist.  And – most importantly – it would issue debt that would be used to the Brady Bond like schemes.  Just as Monnet’s European Coal and Steel later became the EU, this RTC would become the Department of Treasury for the emerging EZ federal republic.

    4) Greece should refuse to negotiate at all until the above is created, but then once the above is created to recognize their authority and accept their dictum.   This surrender of Greece sovereign power to the Euro RTC would be precedent then to show the power  of the EZ federal institutions.   This corporatist and trade bloc power structure of the currently  confederate union must be broken.  Those institutions which support the maintain of this power – most importantly the Karlsruhe, mist be subsumed in trans-EZ matters to the ECJ and the Euro RTC.

      5) An “edge” must be created.  A trans-Europe anti-austerity directorate must be well funded and then set loose across Europe.  If Germany does not back down if the above are not forthcoming, French taxi drivers protesting against Uber will be made to look like light weights.  A “résistance”  must be created.

    6) I think all the above are not only required, but can be accomplished with Greek leadership.  Greece must do all the above.  I think the majority of Europe, those who would be the direct representational voters if they were allowed democracy,  are behind Greece.

    7) To allow all this to take place in the end , the USA must get off of Europe's back.  The USA must risk the emergence of a hard power country, the republic of the EZ - already every bit the match in aggregate to the USA economic power.  The USA must evacuate Europe and end the post WW II occupation.

The True Nature of the Greek Crisis - and the USA Role Ongoing

“But Europe is solid with herself. France, Germany, Italy, Austria and Holland, Russia and Roumania and Poland, throb together, and their structure and civilization are essentially one. They flourished together, they have rocked together in a war, which we, in spite of our enormous contributions and sacrifices (like though in a less degree than America), economically stood outside and they may fall together. In this lies the destructive significance of the Peace of Paris. If the European Civil War is to end with France and Italy abusing their momentary victorious power to destroy Germany and Austria-Hungary now prostrate, they invite their own destruction also, being so deeply and inextricably intertwined with their victims by hidden psychic and economic bonds.”

                                                         Lord Keynes  Economic Consequences of the Peace

                                                                                                                                                1919

Over the last 95 years since Lord Keynes wrote these words, perhaps the most prophetic analysis every provided in world history, and where after the carnage of World War I of approximately 22 million which almost brought world communism into power and did so in Russia, the European area went on to suffer another 25 million to 35 million dead out of world death of 70 million to 85 million from World War II.  Keynes was Biblical in his prophesy.  And all this took place for one reason which Keynes also nailed, a reason that is still putting Europe at great risk and which for what can only be mendacious, desire for personal gain, trite power and obscene national “gloire” reasons, that continues to rot and fester in Europe.  This is the framing for what Keynes called the “European Civil War”.  To Keynes Europe had already long become one country, one sovereignty – a Europe that is “solid with herself”.  That is still the reality and the main issue underlying the current Greek crisis and the entire chronic sovereign debt crisis of Europe.  Whether Germany wishes to recognize it or not, they are “solid” with Greece, with Spain, with all of Europe.  They are one country.  And now the shoe is on the other foot and Germany with fellow political moralist countries like Finland and the Netherlands “invite their own destruction also, being so deeply and inextricably intertwined with their victims by hidden psychic and economic bonds.” What fate that awaits Greece, then no doubt Spain and then Italy, and then the next victim of the ”spoils of trade” predatory Maastricht Treaty with the financial Ebola transmission device called the Euro, will be in the end Germany and their claque’s fate.

The Greek crisis is not financial, it has nothing to do with Greek spendthrift and scofflaw ways, nor does it have anything to do with low savings rate or tax avoidance, the crisis is only about how the answer to Keynes’s observation, the cure to the ongoing European Civil War was waylaid and sidelined by only a few.  There is no doubt that there are many tax criminals, scofflaws and corruption, but it all has little is anything to do with the current crisis.  The Greek crisis is a European wide crisis and will always be so whether or not the flippantly named “Grexit” takes place or not.  The Greek crisis has always been a constitutional crisis and the conditions that are behind it have been so ever since Bismarck left Paris with Alsace Lorraine for Germany, ignoring the Keynes reality that the nation state in Europe had already an anachronism given economic binding long in place. It has been so ever since that terrible error made by Beethoven in his 3^rd , dedicated to Napoleon.

Constantly frustrated with the ego and singular French centric view of aptly named De Gaulle in the midst of World War II, the USA started to rely upon another Frenchman, Jean Monnet.  It was clear that De Gaulle was to strive to move Europe back to the ways of old, ignoring the realities of Keynes’s “Europe solid with herself.”  He meant every word when he would cite: “France cannot be France without greatness.”   Jean Monnet was very much French, but he was a person of deep international experience, took great lessons from WW I and noted how WW II was a repeat again of all that brought WW I.  That the disease of Europe was the fanatical delusion of promoting and organizing the people under the Westphalian nation state which had long died, drowned in tidal waves of gore and blood and misery.   He was a pragmatist, having conducted business with as a mundane role in the Canadian Hudson Bay Company to massively important role in effectively joining the FDR war cabinet and creating the concept of the USA  ‘arsenal for democracy”.  But unlike  others, Monnet was a realist, a pragmatist and who had  lost all interest in the French concept of “greatness”.  He was attached to the French government in exile in Algiers, no doubt to contain and impede De Gaulle as being FDR and Churchill’s “man”.  De Gaulle grew to detest him. In Algiers before the war end Monnet started to lay down his philosophy for the “United States of Europe”:

"There will be no peace in Europe, if the states are reconstituted on the basis of national sovereignty... The countries of Europe are too small to guarantee their peoples the necessary prosperity and social development. The European states must constitute themselves into a federation..."    1943

Monnet had had enough of the European Civil War and began to frame the solution, a solution as valid and necessary now as it has been since 1870. After the war he went  to France and quickly found himself with no job in the new French government, though he stayed close to Robert Schuman, the French Foreign Minister.  Monnet often used Schuman as the front for many of his schemes and devices below.  But he did find much to do with the occupying Americans and quickly became one of the authors of the Marshal Plan, and then more importantly one of those who decided how the American money  from the plan was applied.  This gave him great power, especially in Germany.  He continued to write  his plan for Europe, making what was one of the world’s first “think tanks” building a staff who dealt almost exclusively with the concept of a “United States of Europe”.  And since he had great power with his placement with the Americans he had great clout, and, in fact, his ideas started to make great sense to the neo-liberals and especially those salvaging Germany.

“Through the consolidation of basic production and the institution of a new High Authority, whose decisions will bind France, Germany and the other countries that join, this proposal represents the first concrete step towards a European federation, imperative for the preservation of peace.”

                                                                                                Jean Monnet  (Speech Schuman gave)

                                                                                                                                                                                1950

“Continue, continue, there is no future for the people of Europe other than in union.”

                                                                                                Jean Monnet   (circa 1955)

The first step in the Monnet Plan  formed cross border authorities that weakened the nation state as they assumed “high authority” in critical areas.  Series of institutions were formed that answered large trans-Europe problems and challenges.  The European Coal and Steel Community, the European Atomic Energy Community and many others were launched.  Monnet was crafty – he made certain those that ran these “communities” were European in focus, not nationalists, and their management and governance was over wrought and larger than mere industrial authorities, but were in every way the template for a government.  Germany was eager to be completely involved with these Monnet creations.   The great European Konrad Andenauer,  the founding father of modern day Germany, immediately partnered with Monnet for the ECSC and all the Euro projects as it would help redeem Germany, speed the rescue and rebuild of Germany.

This concept of a United States of Europe became central for all German leaders that followed Andenauer, especially Kohl (supposedly Merkel’s mentor but disowned by Kohl after she turned her back on the unification of Europe.) until Shroeder.  So when the Maastricht Treaty was signed, Kohl felt it was certain this was the birth of the United States of Europe:

“European Union marks a new, decisive step in the process of European integration that in a few years will lead to the creation of what the founding fathers of modern Europe dreamt of after the last war: a United States of Europe.”

                                                                                                                Helmut Kohl

1992

And the Maastricht Treaty carried on until it was certain the Euro Zone would be launched with the brave new Euro Dollar, with the creation of a European Parliament, and an executive, of sorts, Monnet’s “Higher Authority”,  the European Commission with a President, sitting to the side of the EP.  But the European Council, composed of the leaders of the nation states maintained supreme authority.  Still it was thought surely a sovereign Europe would emerge based on democracy and with the Treaty converted at a suitable time into a constitution.  A European Central Bank was created as well as a European Court of Justice, a supreme court for Europe. Even France was going along with Mitterrand adamantly pushing Maastricht through a French referendum and gaining a “Yes” vote. Mitterrand also freely used the term the “United States of Europe”.

But then, from 1992 onwards the entire idea of the risk of a “European Civil War” requiring a “United States of Europe” seemed to be erased, almost overnight, and rarely heard or discussed from 1992 onwards, after the passage of the Treaty, to this day.

And it is that this entire goal was scrubbed out, or attempted to be scrubbed out, the USE, why there is a Greece crisis now.  

Greece represents the fallacy and ruse that occurred post 1992 by a rather small group of actors for very narrow even mendacious reasons.  That if there had been the formation of the USE, if momentum had continued as all thought was towards an inevitable conclusion pre-1992, we would not now be having a Greek crisis.  Furthermore there would have been approximately 10% more GDP in Europe now, a 1.5 trillion dollars difference to today’s stagnation.

What happened?

German reunification. 

German reunification  with a massive subsidy to East Germans via that unification in the exchange rate of one for one for pensions salaries and two for one for loans, with a one for one cash conversions for small holdings and only a one for two discounting for large holdings.  The economic realities at the time suggest a ten to one reality, if not greater.  Then Germany went on an immediate austerity for all aspects of society so as to welcome back their long lost brothers and sisters.  Benefits were curtailed, hours of work via long extended summer vacations, salaries went down or had very low if non-existent increases and productivity while at first hit hard as the aged East German system came onboard, then soared.  Savings more than doubled and Germany suddenly flipped from being the sclerotic sick man of Europe to being the most vibrant and productive with the strongest balance sheet.  In short German supported with mass buy in and patriotic enthusiasm from all Germans did what the Troika is asking now of Greece.

Then Germany entered the Euro at the conversion rate of two DM to one Euro while it should have been one to one.  Given the above and now masked by the common currency, Germany immediately leaped to a dominant position for all of Europe.  The German machine once again ripped through Europe, only this time not with Panzer tanks, but with massively advantaged intra-Europe trade position.  The vestiges of the cost to unify Germany were quickly covered, and then Germany went on for German sake, able to accomplish in a only a few short years what Napoleon failed at and what Hitler succeeded at first but required a 50% spend of GDP on military forces to do so then of course failed. 

With the USA assuring Germany – and all of Europe – security, Germany was allowed to maintain only a token military force and spending only ¼ of the amount of GDP that the USA spent on defense.  The low saving rate countries with low efficiencies faced with availability of high quality German product at about 50% of the cost prior to the Euro, quickly bought all the could from Germany, all of it  financed from German banks or their own domestic banks who in turn borrowed effectively from Germany though with the German institutions enjoying the “ring fencing” of TARGET2 payments, moving their liabilities to the ECB facing the Central Bank of Greece.

From 1992 onwards, given the above, the mention of “United States of Europe” was no more, the referendums that tried to replace the Maastricht Treaty with a Constitution failed, and the German Constitutional Court, Karlsruhe, slammed the door on encroaching federalism that might impede this money machine Germany had become.  German went on to not only solidify their  unification, but now the “austerity” the good Germans imposed to allow for German unification – which by the way they asked and received help to finance from the world – now went on given their position of trade to create massive wealth for the German people which developed into a hypocritical smugness if not a sense of entitled superiority of the Volk over the rest of Europe.  And with the Karlsruhe “order” to prevent any transfer payments or direct assistance to those building massive trade imbalances with Germany, the Maastricht Treaty arrangement locked Europe into a confederacy.

With no transfer payments and limited internal mobility – for example a Greek cannot just move to Germany  to take advantages of the German advantages without giving up their pensions and not being able to easily take advantage of the German societal safety net or benefits, and with no drachma to change exchange values with a DM so as to eliminate trade advantages via currency, when the credit ran out Greece had to make remedy to those imbalances by seeking assistance  from the Troika and then by adjusting to massive unemployment.  While this limited trade to Germany, Germans given their power now in the EZ without pause flip the Euro down to 1.1 and replace the Southern Periphery with the USA and others as trade targets and continue to build predatory trade surpluses.  For Germany, life is great, but it is an insular thoughtless and selfish view which has always caused the European Civil War to carry on.  Only the long time USA occupation of Europe has prevented it all  to be at this point drowning in blood.

But the forge of misery and the danger of 30% to 50% now chronic youth unemployment in the Periphery is starting to shift some back to the pre-1992 thinking.

“If you really want sound budgetary policies over the long term, you need a European finance minister answerable to the European Parliament and with clear rights to intervene vis-à-vis the Member States. The vagaries of the ratings agencies cannot be a substitute!”

                                                Viviane Redding European Commission Vice President

                                                                                                                                                2012

While Greece is in the forefront, they are really not the main player in this crisis, though they are relevant.  By allowing the IMF into the house and using IMF funds to pay down German banks and institutions, Greece has lost their power as no German institution gives a fig as to what they now do – they can go hang and all Germany is doing is going through the act in expressing concern.  The amount of Greek youth unemployed is still a mind boggling 60%, the usual number required for revolutions in the past,  but the amount is small at about 1.8 Million.

Spain though is a completely different story.  Spain never did deal with the Troika and has adjusted not with IMF funds paying down German lenders, but with dropping economic activity a walloping 16% GDP per capita and has youth unemployment of 60%  that numbers 8.5 Million youth.  Debt outstanding is a very large 250 billion or so, most still to German institutions while Greece has external debt of about 150 billion, but almost all of that is now to the ECB and the IMF.  If the Spanish status is added to Italy status – Italy is almost identical to Spain in size of debt but has only 40% youth unemployment and has only adjusted via GDP per capita by 12% contraction,  but the populace is bigger, so youth unemployed in Italy is about 8 million.

The problem in Europe, the potential landmine, is not Greece but Spain followed by Italy.  If solidarity is found between Spanish and Italian youth, Europe will go to insurrection and blood as 16 million youth are justified to take action against what Germany is doing to them.  An aside is Germany has expanded, still, through the crisis by 2% GDP per capita, and youth unemployment has dropped from 11.5% in 2009 to 7.2% in 2015.

“It is a debate, ultimately, about two different visions of Spain. One side sees a country struggling with economic and political problems, but problems that are fixable within the system. Their opponents see a political and economic order so profoundly flawed that it requires not more reform, but a new beginning. It is a clash of visions that is likely to grow more intense in the run-up to a general election next year. Four decades after Spain’s seemingly smooth transition to democracy, the risk of political rupture is growing.”

                                                                                                                Tobias Buck,  FT Dec 2012                        

Greece is not being thoughtful.  Instead of appealing along financial and technical lines, they should drop all discussions with the corporatists IMF and the stumped ECB, and the silly overtures to Putin, and instead should organize solidarity and formal unity with Podemos and then USEUR in Italy.  Great effort should be expended upon this, and the axis should be youth.  If the youth in Spain and Italy can be radicalized, and then added to Greek youth, the current German confederacy harvester machine will fold.  At that same time Syriza and Podemos should stop ancient leftist clap-trap and reassume the mantle of Jean Monnet.  Unity should be sought to the edge of evoking civil strife and even occasional violence.  Greece, Spain and Italy – if those three countries’ youth have the good sense to see how they are being viciously exploited – have the ability and power to start back along the lines of the United States of Europe thesis.  I would organize, if I were Syriza, a well-financed and well provided, in terms of logistics,  “March on Berlin” and seek at least 250,000 Greek, Italian, and Spanish Youth marching to Berlin on foot.

There has to be an “edge” to this discussion for the Periphery – an aurora of violence and strife – for otherwise the real problem, the political backing to the European and Greek crisis being maintained cannot be ended until there are potentially large adverse consequences for this backer if they carry on as they are to date.

That backer is the USA.

The USA is following a strategy to deliberately maintain European weakness and to prevent their formation of the United States of Europe.  The 300 million plus USE would, if formed, be the complete equal to the USA and the current uni-polar hegemony of the USA would be lost and replaced with a bi-polar shared hegemony.  Russia and China are a tactical problem for the USA, a serious tactical problem, but compared to the USA they are small and weak.  A USE however would be a full equal.

A little less than 4 years ago I was asked to present to the nation’s intelligence agency for a full day.  Was an exciting and wonderful day and I was asked to bring the best and brightest minds on Wall St to come along, which I did.  The topic was the Euro crisis.  The staff we were talking to was seeking either confirmation or debate over the  one page memo they were to present to POTUS the next day.  They cheerfully stated that the entire organization had only one client and the main job of the group was to publish a two or three page memo every morning for the POTUS breakfast reading.  The group I brought had a career highlight day as we were grilled in turn by several groups of the smartest and most able minds I have ever met.  We went on and on, much of the conversation fixated on financial speak and details – TARGET2, borrowing capability, IMF path of action and so on.  But the reason my group was there was that I had previously made the case that Europe was not a financial problem with nothing to do with  credit rating agencies or debt or default, but was a constitutional crisis given the German led swing away from the creation of the United States of Europe.  This is why I was invited.  We found that there was great interest in financial and banking detail, but that the information presented was either to just confirm their own  information or to tweak it as they learned of some new detail or nuance. When I presented the constitutional and historical record to the crisis, that this was the complete nature of the crisis, I was presenting something “new” which almost all given their Georgetown or Harvard PHD in history or foreign affairs instantly started to model around my rather naïve (ie not classically trained) view.  I was well received and as the thesis was debated either there was immediate agreement or developed agreement that the reason for the crisis was only constitutional. There was agreement.

But then all focus went to a surprising thought, or question.  What was the potential for revolution, insurrection and civil strife in Spain?  I admitted I had not even begun to consider that, assuming the USA and Europe had no interest in the crisis becoming bloody.   All in their group kept coming  back to Spain.  Ireland was dismissed as the nature of their problem was not related to German aggression, but their own home brewed property bubble similar to the USA housing crisis.  Greece was considered a problem and the headline catalysts but too small to be a major problem for this group.  But Spain was the main focus.

I raised Mike Pettis’s excellent work on identities and adjustment - to a person,  they all knew his work well and agreed. 

So why has the USA not taken action, if the powers in DC agree completely with what I say above?

EU  military spend is  about $ 192 billion per annum, While the USA budget is about $ 500  billion per year.  The US can deploy 500,000 troops quickly and 100,000 immediately anywhere in the world.   Currently the USA has about 80,000 troops deployed of which 55,000 are in Europe.  The USA has 1.2 MM troops in reserve and active duty.  Europe can deploy 110,000 troops now but would be months before they take the field and has reportedly 1.5MM troops in reserve and active duty.  The USA Naval power is well in excess of 3 million tonnage  in ships while the combined EU naval tonnage is around 1 million tons, most of that service or coastal support ships and coastal defense.               Europe spends about 1.5% of aggregate  GDP on defense while the USA spends now about 4%, and more importantly can surge to 6% plus near immediate.  It is this low required military spend that is the source of all of Germany’s power in Europe.  Then when they frame Europe in a confederacy carefully avoiding the defensive needs of a federation with shared borders and shared defense, Germany is able to establish hegemony over all of Europe.      

The USA does not want a Europe that is spending 4% to 6% for defense, it wants a Europe kept feeble and dependent on  American NATO hard power contribution for their common defense.  They want Russian subs playing with the Danes, Norwegians and Swedish navies, mocking them.  They want the Russian excursion into Ukraine (to a point).   Why?   With the fall of the USSR and the unification of Germany they do not want to see a United States of Europe with a core capable Germany. The USA, while creating the Monnet plan, have done a 180 on that plan and are now dedicated to keeping Europe feeble, not united,  and not a hard power factor.

That is why I heard all those questions on the stability of Spain during that visit in DC.  Why the focus on Spain.  For only if insurrection starts in Spain and Italy does so as well will the USA have to rethink their strategy to maintain a Greek like crisis always on the back burner of Europe.

Tsipras opposition is not the IMF or Germany and he is foolish to see Russia as offering any solace.  Greece’s opposition is the USA and the only way he can return the dialogue to the constitutional defining crisis it truly is, has always been,  is to gain power via unity with Spain and Italy – likely via radicalized youth – and presenting the likelihood of great civil strife, of blood, to both Germany as well as – more importantly – the USA.

This focus on IMF and deals and negotiations along financial themes and lines is a ruse – Tsipras must take to the street, to the now 30 million disenfranchised Peripheral youth.  Now is the time for Syriza to start to hire 100 to 200 youth organizers from Italy and Spain, seek common front with Podemos, and strike - moving this discussion from the economic to the constitutional problem that it truly always was.

What is baffling is how the moderate right in Germany, France and other countries have not come to this realization.  The “European Civil War” is still very much with us now.