The Euro: From integration to disintegration

The Euro: From integration to disintegration

After the largest sovereign-debt restructuring in history ($197 billions), Greece credit default swaps (CDS) pay $ 2,5 billion to the buyers. Greece’s “credit event” happened and triggered a payout on CDS. The good news is: there is no disruption of the sovereign debt market. But, the bad new is that austerity measures are causing a destruction of that country’s social fabric due to massive unemployment, cuts in government spending and privatization of national assets. This is a strategy of cut and dry privatization (CDP) imposed by the troika (IMF, EBC and EC) on the government of Greece. Cut and dry privatization is a no-growth strategy that is weakening the sovereignty and economy of Greece.

In Italy for example 50% of new sales tax receipts have been paid to Morgan Stanley. It was not in the best interest of Italy to renew the derivative contract from the 1990’s, so $3,4 billion went to Morgan Stanley. A sovereign country should not act like a hedge fund and engage in unregulated financial instruments like swaptions, interests rate swaps, interest rate call option or any others derivative to reduce borrowing cost. The risk is too high and taxpayers will be penalized, if the country economy do not improve and consequently cannot resist movements of interest rate and exchange rate fluctuations. Derivatives are responsible for the current economic crisis. As highly risky financial instruments, they are bets on the movements of the markets. The world derivative market is estimated at about $ 790 trillion face or nominal value, more than 10 times the world total GDP estimated at $65 trillion. The derivative market has created a new type of wealth: synthetic wealth.

The relation between synthetic wealth and real wealth is asymmetric. The first has been created by financial-capitalism and the second is a product of industrial-capitalism. In Europe and the rest of the world, human affairs is challenge by the management of this new reality. The dynamic of synthetic wealth creation in the capital market is changing the nature of wealth and the process of wealth creation in human society. This is a complex transformation. We will overcome this challenge only when we will transform how we manage human affairs. At this point, European leaders are not yet in the sphere of management of complex transformations.

Cut and dry privatization is not a viable solution to the crisis because it is engineered to payback private lenders. Theses measures neither create wealth nor economic growth, but stifle the interests of a sovereign nation. European countries like Greece, Portugal, Italy and Spain need structural reform and new strategies of wealth creation that do not focus on synthetic wealth creation, but rather center on a new-industrialization and real wealth creation. Cut and dry privatization has stripped populations of their wealth and created social imbalance. Monetary and political union are in great danger when member nations lose their capacity to create new wealth. Additionally, social fabrics crumble and political leaders fail to engineer innovative public policy. Paying old debt with new debt in the structuration of massive bail-outs is not an efficient economic policy. The consequence of this temporary solution engineered by the “troika” (IMF, ECB and EC) will be a progressive disintegration of Europe.

The euro zone is dysfunctional. An example of this dysfunctionality is the recent move by the ECB to tighten collateral rules on banks bonds guaranteed by governments subject to EU/IMF aid program. This decision is a confirmation of the division of the monetary union into 2 separate zones: crisis-nations and non-crisis nations. German taxpayers are now more uncomfortable with the Euro and feel like they are paying the bill for the Greek taxpayers who are penalized by the consequences of cut and dry privatization. This bad sentiment toward the Euro is now a reality for all taxpayers in the Euro zone. If the European leadership does not find a solution to the structural problem of the European nations, the exacerbation of this sentiment will lead to a total disintegration of the Euro zone; and who know Germany could be the first to leave the monetary union. A Nassim Taleb black swan event is around the corner. The development of this bad sentiment is contrary to the spirit of the treaty of Rome (1958), signed by the six nations: Germany, France, Italy, Netherlands, Belgium and Luxembourg. The concept of “European Integration” was at the center of the political vision of the founders (Robert Schumann, Jean Monnet, Paul Henry Spaak, Konrad Adenauer, Sir Winston Churchill, Altiero Spinelli, Walter Hallstein, Alcide De Gasperi) of the European Economic Community (EEC).

The treaty of Rome was born from the success of the Schumann plan (April 18,1951) to unify the management of the coal and steel industry in the six nations with the creation of the European Coal and Steel Community (ECSC). “European Integration” was a post World War 2 political and economical thinking. The imperative was to rebuild European industries with new vision. European nations were defined by the success of industrial-capitalism born from the very long and painful industrial revolution. The new vision was the construction of a bigger and more sophisticated market; shift from national market to regional market with free movement of persons, goods and services. Since the shift from agrarian economy to industrial economy, industrial-capitalism has been in Europe and the West the best economies in the world. The vision of “European Integration” was founded on the equilibriums in industrial-capitalism based on a harmonization of relations between public and private sector. This key equilibrium has created real wealth: the “wealth of nation”. Industrial-capitalism is the mother of rational management, intergenerational transfer of wealth and the sophistication of its flow in social channels. The European Integration is a complex process of integration of political, social and economic reality of many European countries. It was engineer as a foundation of the European Federation. However, instead today the primary focus of the founders of financial-capitalism in the Euro zone is not “integration” and “federation”. Europe is now a “market-centered” project. This fundamental shift put Europe off-track. A shift from industrial capitalism to financial capitalism in the complex world of the 21^st century has transformed the European project. Financial-capitalism is certainly a phenomenal human experience, but it does not created the “wealth of nations”. This new form of capitalism powered by flash trading is the transfer of the “wealth of nations” to the financial industry and subjecting human society to uncontrollable risks. In 2008, the world economic crisis was triggered by this transfer and the recent bankruptcy of MF Global in USA is another perfect example.

Contrary to industrial capitalism, financial capitalism is based on disequilibrium of the market and market uncertainty. A put option, call option, futures, straddle are all market disequilibrium. Industrial capitalism protects the “wealth of nations” and creates jobs. In contrary, financial capitalism speculates with our wealth and downgrades human labor. This is why the current financial crisis is so severe, it has destroy more than $14 trillion of the “wealth of nations” worldwide. Certainly, the capital market is a key instrument of capitalism, but a capital market based on a self-regulatory structure will degrade capitalism and create sub-capitalism. A new structuration of the European economic system is an imperative for the survival of the Euro zone. It is not possible to build a healthy capitalist society of the future when the “wealth of nations” is increasingly and constantly at great risk and managed by computers and algorithmic formulas. Financial capitalism triggered a dynamic of deindustrialization resulting in massive unemployment and poverty in Europe, this is the antithesis of industrial capitalism and in contradiction of the original vision of the Euro zone.

Aboubacar Sissoko