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Ten Years of the Euro and Nothing to Celebrate

On Jan. 2, 2012, the European single currency turned ten years old. The European Union staged no celebrations, which in itself says more than a thousand analyses: you don't celebrate the birthday of a corpse.

There is nothing that can fill the growing gap between the ballooning debt and the collapsing physical economy, which the deflationary measures and brutal austerity only worsen. While the case of Greece is the most dramatic in the EU with the economy shrinking by one quarter and suicide rates increasing by 40% since the beginning of the crisis in 2011, administering austerity on larger and supposedly more "robust" economies such as Italy will have similar devastating effects.

For instance, compared to the $1.6 trillion created by the Federal Reserve in August, and €500 billion created by the ECB in December, stock markets alone lost $6.3 trillion in 2011. This is new debt, but only a small part of the global financial debt, which is mainly in the shadow banking derivative game.

The ECB lent half a trillion to the banks in the first of the two three-year tenders (the second comes in February) at 1%, and the banks have parked most of that money at the ECB for a quarter of one per cent, losing 0.75%. That money is kept far away from the real economy and from Eurozone sovereign bonds – with the exception of short-term notes. In fact, at the last auction of Italian government bonds on Dec. 30, only three-years notes were in strong demand, which brought yields down to 5.6% from the 7.89% of the previous auction. But seven-year bonds, not covered by ECB loans, sold at 7.42%, almost three points, up from the 4.52% of the end of August.

Italy, the third largest economy in the EU, is now considered the most likely trigger of a final collapse. As EU puppet Prime Minister Mario Monti said in his year-end press conference, the Italian economic trend will determine "the future of the euro and of the world economy".

What Monti did not say was explained by Deutsche Bank chief economist Thomas Mayer, in an interview with the Frankfurter Allgemeine Zeitung of Dec. 25. "At the beginning of next year, Italy will fall into a deep recession. If the country manages to get back out before the elections in May 2013 – which I expect – then Italy may be a role model for all southern European states. Otherwise, the Eurozone will break apart."

Linear projections made by Intesa SanPaolo give a drop of Italian GDP to minus one percent next year. In 2012, Italy must roll over about 400 billion euros of debt and the EU deals demand a reduction of the deficit to zero in 2013. Furthermore, the EU demands that Italy cuts 5% of its debt every year, in order to bring it down to 60%. The absurdity of such a proposition has been underscored even by economists.

In Mayer's view, the withdrawal of at least one country from the Eurozone is now expected. The withdrawal of Greece is no longer considered a taboo. There is a high risk, he added, that after the 2012 parliamentary elections, a new government may take power in Athens that is either unwilling or unable to carry out the drastic austerity program. The Greeks would then be forced to quit the euro, and print their own money -- the drachma, or something else," Mayer said.

A breakup of the euro is inevitable and necessary. However, alone it is not the solution. Only a strong recovery of the physical economy will solve the problem, and that is impossible without reorganizing the bankrupt financial system in line with the Glass-Steagall standard.

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