For a Few Euros More

Posted by: on Apr 24, 2015 | No Comments

leaning towerThe migrant crisis in the Mediterranean is symptomatic of the wider malaise afflicting Europe, the new Wild West.  As Sergio Leone put it ” where life has no value, death, sometimes, had its price. That’s why the bounty hunters appeared”.  Today, after the Euribor finally went negative, it seems quite plausible and legitimate to update the phase to “where Euros have little less value, death, sometimes, has its price, that’s why the people traffickers appeared”.  When banks and governments are being paid to borrow Euros you have to ask the question: has this inverted perversion of classical economic theory hastened the beginning of the end for the Euro experiment?

The process of lending something must have a positive value in all but the shortest of timeframes otherwise a profit is impossible and everything must therefore end up free.  If a car hire firm pays the customer to rent the car a) nobody would ever buy a car and b) as long as the business has other costs in doing business (excluding the fact that interest rates may be zero) such as staff costs or rent on premises, they will be a loss making and unsustainable business quick smartish. It all sounds, and is, an utter nonsense.

Mr Draghi wants the banks to lend, or another way of looking at it, to take on more risk, or another way of looking at it, believe in the inflation trend and ignore the likelihood of the tightening cycle. The banks don’t want to lend to the real economy because they know its a terrible trade so they have dumped everything into the corporates and the interbank market resulting in yesterdays new lows.

Mr Draghi is trying to fix (and not in a good way) the competitive game. To bend the hand of the market and cui bono to his will to preserve the political project, but without the necessary fiscal union. The problem is when you fix a game you may find nobody turns up to play it.  Therein lies his problem. If, for example, everyone knew the 3.10 at Perth was fixed nobody would turn up to the racecourse and nobody would place a bet on the race. He wants to bully the market with his tower of chips when everyone else just wants a stable stack.

Thomas Jefferson said two hundred years ago that “banks are more dangerous than standing armies” and that “speculators sweep away the fortunes and morals of the people”. With the Euro losing values at this rate soon everything the EU does will be free. Negative nominal and real interest rates are a plausible possibility and before we know it the banks will have to subsidize their debtors. They might call it a “loyalty bonus”, borrow 20,000 Euros at zero cost for a car and receive 1,000 Euros cash back every year of the loan. It sounds crazy yet worryingly possible in this brave new world.

Back to the life and death of real lives, migrants flooding into southern Europe are only operating rational self interest by trying to balance risks against benefits. They hear that the magical Eurolands (and the UK) are paved with gold where everything from housing, employment subsidies, unemployment benefit, medical provision, to name but a few, are all free on demand from conception to grave. Who wouldn’t take a punt for that and to escape the savages of the Islamic State?

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