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Wednesday, 7 December 2011

Super bazookas

According to another pink paper, negotiations have been started over a much a much bigger financial “bazooka” to present at this week’s European Union summit that could include running two separate rescue funds and moresupport for the International Monetary Fund. This three-pronged rescue system would form part of a carefully crafted package EU leaders hope will win over financial markets, just two months after a similar summit failed to convince bond investors. The rescue system would be introduced alongside proposals to rewrite EU treaties with far tougher budget rules for the eurozone. Well that ain't gonna work, and the politicians and bureaucrats are too stupid to realise why, so let me explain. We are now at the position where it is the lenders of last resort that are at risk or potentially at risk of default. There is no real backstop (if we discount the US and China). Sure there is the IMF, but do we really thing that the world's countries from Afghanistan to Zimbabwe are going to backstop the euro? No the idea is that the Euro area is going to bolster its finances by borrowing top boost its financial resources. It will then have enough cash to bail out countries as required? Does that make sense? Of course not because the whole euro area or may be EU becomes more indebted. Of course to a politician, much like a businessman whose business is going under, the obligation to repay the loan gets ignored as though it is somebody else's problem. The rest of the world sees it differently. The country/company is up a creek and it needs to find a paddle, not borrow more money. For the euro zone countries that means taxing more or spending less. It also means more exports and fewer imports. In the long run there is no other solution, but that doesn't stop the incompetents in Brussels trying to take control of a €500 billion or €1 trillion fund, despite their obvious lack of relevant experience or talent. Expect to hear a lot more in the coming weeks from the likes or Messrs Barroso and Juncker (ex-PM of a country with a population smaller than the city of Nottingham).

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