–The European Union: The solution for too much debt is to borrow even more

Here is the European Union’s plan to save the eurozone: Ask people to lend to a poor person, then ask the poor person to lend to deadbeats, who can’t afford to service their current debts, much less pay for new debts.

What could possibly go wrong with that?

New York Times
Euro Zone IMF Loan Target in Danger as UK Declines
By Reuters, December 20, 2011

BRUSSELS/LONDON – Euro zone ministers agreed on Monday to boost IMF resources by 150 billion euros (125.8 billion pounds) to ward off the debt crisis and won support for more money from EU allies, but it was unclear if the bloc would reach its 200 billion euro target after Britain bowed out.

Following a three-hour conference call, European Union finance ministers said currency zone outsiders the Czech Republic, Denmark, Poland and Sweden would also grant loans to the International Monetary Fund to help save the 17-nation zone.

But the EU said those lenders must first win parliamentary approval, while Britain made it clear it would not participate in the plan. That leaves the euro zone more reliant than ever on major economies such China and on Russia, which has shown willingness to lend more to the IMF. The United States for its part is concerned about the lender’s exposure to the euro zone.

“Euro area member states will provide 150 billion euros of additional resources through bilateral loans to the fund’s general resources account,” the EU finance ministers said in a joint statement after their call.

“The EU would welcome G20 members and other financially strong IMF members to support the efforts to safeguard global financial stability by contributing to the increase in IMF resources,” the statement said.

O.K., let’s see if I can explain this: The euro nations, being monetarily non-sovereign are unable to create euros. So unless they can obtain euros from outside their borders, or cut way back on spending (aka “austerity”), they will be unable to pay their bills, long-term.

But, if the euro nations cut spending, and force austerity, they will have the worst recessions – more likely depressions – imaginable.

Then again, if they borrow, that borrowing must be repaid, so the euro nations will be in worse shape than before. In essence, they have maxed out their credit cards, and now are looking at friends and family to lend them even more – and they still have no source of income with which to pay the old loans, much less the new loans.

Meanwhile, the EU, which has the unlimited ability to create euros wants the IMF to borrow euros so the IMF can lend euros to the euro nations. That’s the plan, as opposed to the EU simply giving euros to its member nations.

Speaking during testimony to the European Parliament, ECB President Mario Draghi praised EU efforts to forge a new ‘fiscal compact’ as a solid base for responding to the crisis, and called the euro an “irreversible” project.

“I have no doubt whatsoever about the strength of the euro, about its permanence, about its irreversibility,” he said.

“You have a lot of people, especially outside the euro area, who really spend a lot of time in what I think is morbid speculation, namely, what happens if? And they all have catastrophic scenarios for the euro area.”

But he said bond market pressure on the euro zone would be “very significant” in the first quarter, with some 230 billion euros of bank bonds, up to 300 billion in government bonds, and more than 200 billion euros in collateralized debt all maturing.

Draghi, in a classic “whistling-past-the-graveyard” statement, says the euro is strong and “irreversible.” Unfortunately, the euro nations are not strong; most are insolvent, with giant debts to pay. And as for the euro being irreversible, that’s just plain stubborn nonsense.

While EU leaders agreed at their last summit on the desire to boost IMF resources, there are doubts about whether the scheme will work, with not just London and Washington unenthusiastic, but Germany’s Bundesbank too.

The “plan” is to lend euros to an under-funded middleman (the IMF), which then will lend euros to nations already drowning in debt. Meanwhile, the EU, which has unlimited funds, stands on the sidelines and demands the euro nations destroy their economies.

There continue to be two, and only two, long-term solutions for euro nations:
1. Return to Monetary Sovereignty by re-adopting their sovereign currencies or
2. The EU to give (not lend) euros to member nations as needed.

Those who do not understand Monetary Sovereignty do not understand economics.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports


9 thoughts on “–The European Union: The solution for too much debt is to borrow even more

  1. There continue to be two, and only two, long-term solutions for euro nations:
    1. Return to Monetary Sovereignty by re-adopting their sovereign currencies or
    2. The EU to give (not lend) euros to member nations as needed.
    Those who do not understand Monetary Sovereignty do not understand economics.
    1.Absolutely a difinative solution

    2.To give with no way of controlling the quantity and quality may have an unintended consequence—INFLATION.This solution would increase monetary circulation without any increase in productivity.It would also go toward increasing the gap between the have’s and have not’s,since the funds would go directly to the payment of debt (read the 1%).
    The good news would be ,Maybe they would then lend it out with interest instead of inflation,oophs which would be the lesser of two evils ? ?
    3 I have no difficulty understanding Monetary Sovereignty,
    but I sure do ;understanding economics.


    1. The money was created by the loans. A note for a thousand euro debt is equal to a thousand euro note (if there is such a thing.) They are the same.

      If the EU gives euros to the debtor states, and they use the euros to pay their debts, that simply will be an exchange of assets, and will not create additional money. Thus, there are no inflation implications for the EU paying existing debts.

      Yes, if this encourages the euro nations to spend wildly, at some point inflation could emerge. If the U.S. is any example, it would take a truly massive amount of spending to cause inflation. As you can see, U.S. inflation is moderate, despite what debt hawks consider massive deficits.

      The reason: Inflation has been related to oil prices, not to federal spending.

      Rodger Malcolm Mitche”


      1. If reading yur reply correctly,you agree that giving could be inflationary?Giving would demand future giving because the receivers MUST continue to spend to exist and therefore create new debt which will require a New giving.
        What country,people (read politician) would stop spending “wildly” if they knew their debt would be forgiven.
        Interest,especially compound interest is an essential condition that must be placed on printing (circulation) of currency.Is inflation really just too much free money in circulation,money made visible thru prices.
        Once you add in this money can be used on margin,it becomes HYPER.


        1. Justa . . .

          You seem to see only what you want to see. Yes, spending could be inflationary, but only under specific conditions. You are so mentally locked into the “compound interest” myth, you cannot see anything outside it.

          The U.S. has been Monetarily Sovereign for 40 years, and many feel it has been spending “wildly.” So where is the inflation? What does your compound interest compound interest tell you about the very low inflation we currently experience — after 40 years of “wild” spending?

          During that time, there has been zero relationship between federal deficit spending and inflation. (See: https://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/ ). How does your “compound interest” hypothesis explain that?

          The worst thing that ever happened to you was to read Einstein’s comment about compound interest. It blinded you to real economics.

          Rodger Malcolm Mitchell.


      2. “The money was created by the loans”

        Which loans? When the banks bought the Greek bonds, lending to the Greek government? Seems to me that is just an exchange of financial assets, similar to redemption of the bonds.

        I think money would be created when the ECB “gives, not lends” to the countries.

        As for inflation, does Greece not already have higher inflation than, say, Germany? They use the same oil as the Germans do. So the spending in Greece is already “wild” enough to cause inflation? Even though they also are in great pain trying, unsuccessfully, to control their spending? What will they do when they are told that they can overspend all they want (or “as needed” – to prevent riots), and not have to worry about “austerity” ever again?

        I think only the first option is really long-term viable. There seems to be way too much disparity among the various countries for them to share a currency. They don’t have the same sense of unity and commitment to each other that the US States have.


        1. Right. The original loans created money. After that, there were just asset exchanges. When the loans are paid, money will be destroyed.

          Though inflation in America has been caused by oil, inflation can have other many causes, and one is economic chaos, which reduces the value of a nation’s debt instruments. Greek debt instruments lose value with each headline.

          Since a debt instrument is nothing more than a claim on money — just as a dollar bill is a claim on a dollar — chaos is inflationary. Historically, hyper-inflations have been caused by this sort of chaos, not by oil prices.

          Rodger Malcolm Mitchell


  2. 1. Return to Monetary Sovereignty by re-adopting their sovereign currencies is the better option for Greece considering it will get its democracy back. In the meantime the Euro-zone will have to do a fair amount of debt forgiveness.
    If austerity becomes more virulent in USA, even California might have to think along similar lines.


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