The Issue Europe Won’t Face


Europe’s leaders emerged far apart at their summit dinner in Brussels Wednesday night. They could not even agree on relatively easy measures to contain the escalating crisis, such as Eurobonds or a greater role for the European Central Bank (ECB).

But at the core of the crisis is an issue that Europe’s leaders are even more reluctant to take on—the ease with which hedge funds and other speculators can drive a small economy into the ground.

When the socialist government of George Papandreou took office in 2009, his people soon found that basic statistics had been fudged by its predecessor conservative government, and that Greek debt was higher than previously reported. But the Greek economy was still in relatively decent shape. A downgrade by credit rating agencies ensued, followed by massive speculation against Greek bonds by outfits like Goldman Sachs and Deutsche Bank as well as hedge funds.

“Spreads”—the difference between Greek government borrowing costs and those of Germany—widened throughout the spring of 2010, creating a financial crisis and driving Greece into a severe slump. This in turn in reduced the value of Greek bonds to junk, and led to the perverse bail-out deals in which the European Union and the International Monetary Fund (IMF) advanced the Greeks money in exchange for austerity programs that only deepened Greece’s depression.

Defenders of financial speculation argue that the banks and hedge funds are only helping markets detect the “true” value of securities such as Greek Government bonds. This argument is self-serving nonsense, for the speculation itself creates a self-fulfilling prophesy.

By driving down the value of the bonds, the speculators help deepen the crisis, the bonds are soon worth even less, the speculators make out like bandits, and a real transfer of wealth occurs from Greek citizens to hedge funds and banks. 

Back when no such speculation was permitted, in the 1940s and 1950s, Britain and France came out of World War II with higher debt ratios than Greece had in 2009-2010. But their real economies were permitted to grow, and there were no hedge funds on the scene to increase the pain and retard the recovery.

The problem with plans to contain the Euro-crisis by driving Greece out of the eurozone and then building higher “firewalls” around Spain, Portugal and Italy, is that speculators will just turn against the bonds of those countries.

How to drive the speculators out of business so that the real economies can recover? There are only three ways:

Either the ECB makes massive bets to defend the attacked bonds, causing speculators to lose their shirts and spoiling their destructive game (if the ECB had done that in early 2010, the whole crisis could have been short-circuited, and Greece could have had time to reduce its debt ratio in the absence of panic conditions); or a Financial Transaction Tax (FTT) is used to take the profit out of such speculation; or regulations can prohibit speculation with borrowed money, making the game prohibitively expensive.

But major governments have been so thoroughly captured by financial elites that only one of these options, an FTT, is even on the table; and it will be vetoed by Britain and the U.S.—the most Wall Street-afflicted of the major nations.

Until Europe and the U.S. get serious about containing destructive financial speculation—which caused the crisis, after all—the other measures aimed at solving it will be mere palliatives.

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