What looked like a Euro Zone debt problem could have devastating effects worldwide just as the cataclysm of World War I did almost one hundred years ago and World War II did one generation after that. The Greek debt crisis began it all several weeks ago as discussed in the Tuesday, May 24, 2011 article in the Wall Street jNow everyone thinks it’s inevitable that there must be some sort of restructuring of debt for that Balkan country. As if that weren’t bad enough, over the weekend Spanish voters turned the Ruling Socialist Party out of office in droves, increasing fears that the new office holders will reveal more hidden local and regional debts. The final straw was a negative report on Italy’s credit rating on Friday.

Investors perceive that Europe’s Debt Crisis is worsening and is not isolated. It may pull the whole currency down with it as well as effect Europe’s politics. This only draws attention to the open dispute between the European Central Bank and the various governments of Europe about what to do with Greece’s growing debts.

All these splashy stories made the Dow fall 138.78 points on Monday. For the month of May the Dow was down 3.4%. The Euro slipped again. It fell below $1.40 on Monday and ended at $140.49 against the dollar. As a result investors fled to the security of U.S. and German bonds.

But ultimately the very security of Germany’s bonds depends upon the wide reach of the euro currency. So it cannot draw in its wings. It must spread them wide. It is only a tribute to the German people that after the immolation of World War II they are, phoenix-like, rising from their ashes and trying again and again until they get it right. Hopefully this time they can prove their mettle in dealing with the the Euro Zone debt crisis.

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Adolf Hitler

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Germany wants to extend its economic reach through the euro and compete directly with the United States, but Germany has run into the roadblock that it cannot control Greece’s internal politics.

In the Monday, May 23 article in the Wall Street Journal, “New Call To Greece To Sell Off Its Assets”, the author quotes Luxembourg Prime Minister Juncker as saying that Greece should set up a state agency to sell off state assets the way the Germans sold off East German assets during the 1990’s. This statement was part of an interview with Der Spiegel which has been published today, Monday, May 23.

Clearly they are trying to establish Germany as the model for all of Europe to follow. They even suggest that Greece put “foreign experts” on the staff of such a state agency. Of course Greece will object that this is a threat to its national sovereignty — to put Germans in power in Greece.

Jean-Claude Juncker says that Greece should only consider “soft restructuring” of its bond debt after it has set up such an agency. That would increased confidence in the markets and prevent a potential world-wide reaction to Greece’s debt problems.

These fiats were issued after the Euro Zone’s “Big Four” held secret talks in Luxembourg over the weekend.

Germany must find a way other than breathing down Greece’s political neck and causing riots and protests in the streets of Athens to enforce its will.

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Prime Minister Jean-Claude Juncker, Prime Minister of Luxembourg where secret talks were held over weekend

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Could this be the beginning of the meltdown of Germany’s great postwar experiment, the euro, as the universal European currency to give Germany economic muscle more heft? On Friday the euro sank to $1.4157 against the dollar, down from $1.4311 on Thursday, because of the threat of rescheduling the Greek bonds and the uncertainty about what will be learned about the Spanish debt after the election.

Spain, unlike Greece, is Europe’s fourth largest economy after Germany, France, and Italy. It’s too big to bail out. That’s why Germans have been using the word “reprofiling” instead of “rescheduling” the Greek bonds.

This is all happening rather suddenly. In early May higher Euro Zone interest rates led to a value of almost $1.50 euros to the dollar. The euro is down almost 5% since the beginning of May. To make matters worse Fitch Ratings on Friday downgraded Greece’s credit by 3 points. Standard and Poors has already done so.

Everybody sees the widening of yield differentials between Spanish and German benchmark debt with Germany used as the standard for the Euro Zone. Will Europe be able to survive this company of unequals? Or will it again break up into its old individual currencies? And if it does so, will the ill will and conflicts bring skeletons out of the closet? Will they spark more violent clashes over unresolved issues such as the border between Poland and Germany — the former East Prussia — which is now a sort of No Man’s Land? What about northern Italy, once part of Austria, and given to the Italians in one of World War I’s most notorious dirty deals?

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It looks more and more likely that The Spanish government will fall, causing a radically unstable situation for Germany and the EU. In an article in the Saturday, May 21 edition of the Wall Street Journal, “Spanish Prime Minister Calls Protests Understandable”, Prime Minister Zapatero says that he finds the youth protests “understandable” but still will crack down on them over the weekend so as not to interfere with voting. Citing 50% unemployment for his backers and a 20% unemployment rate over all, a protester called for stepped up rallies in the next few days. Such protests have gained strength since the demonstrations in Madrid, Barcelona, and Valencia.

Remembering the Spanish Civil War of the 1930’s and the takeover by Franco, the Fascist dictator, Germany must tread carefully in making up fiscal policy to fit the largest of the “pig countries” with an economy too large to bail out. It is up to this country more than any other to keep the Euro Zone together.

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Valley of the Fallen, Monument to the Spanish Civil War

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Franco

Germany thought that Spain alone of all the “pigs” would be able to escape a bailout, but recent reports from the Catalonia region make it sound as if Spain might be more of a problem than Greece to Germany’s dreams of a financial empire.

The Catalonia budget deficit was twice as big as anybody feared as reported by the Wall Street Journal article, “Spain Vote Threatens To Uncover Debt”. The socialists were covering up the debt. Rumors say that other local governments all over Spain were trying for years to persuade suppliers to do business off the books and not immediately bill for services. That fact alone could add tens of billions of euros to the official debt figures.

The central government in Madrid has cut its spending so that its debt is now only 9.3% of GDP instead of 11%. But this has had no effect on the practices of Spain’s local and regional governments. And up until now Germany has considered only the national figures.

Since 2003 the local governments of Spain have doubled unpaid invoices. This low payback rate is making economic growth stall out. Suppliers don’t get paid. They can’t afford to hire. They lay off employees. Lately even the trash doesn’t get picked up. In many places it sits in the streets.

This is not a situation that Germany will be able to deal with as readily as it can deal with the Greek Debt Crisis. The Spanish economy is much bigger. It would tax Germany’s resources to bail out its southern neighbor. But still it must do something, or the Euro Zone will unravel.

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In the article in the Wednesday, May 18 edition of the Wall Street Journal, “Oil Chief Leaves Libya As Regime Is Targeted”, Shokri Ghanem is pictured as fleeing Libya to escape the prosecution of the International Criminal Court — a creation of the hypocrisy of the twentieth century.

George Joffe, a Libya specialist at Cambridge University, said that Ghanem’s flight is linked to the prosecutor’s announcement that he intended to prosecute Gaddafi, Gaddafi”s sons, and Gaddafi’s brother-in-law for “crimes against humanity”.

Trials for war crimes have become all too common since the aftermath of World War I. But who is to put on trial these strong men and dictators? Judges from Western Europe or the United States? Such Western men are from a different culture and religion. They don’t think the same way as someone born and raised in Libya.

Not that I’m defending Gaddafi, who was behind the Lockerbie bombing. But who are we to stand in judgement, we who dropped the atomic bomb twice on Japan, beginning the atomic age? Think again! History is basically amoral. So are individual countries. They cannot be judged like individuals. It has been so since the beginning time and will be true for all time. Just think, in the U.S. we make our own president immune from prosecution for his decisions when in office. The last thing we need is a double standard for Libya.

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Gaddafi

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Nato strikes hit two government buildings in Tripoli, including the Interior Ministry, according to an article in the Wednesday, May 18 edition of the Wall Street Journal, “Oil Chief Leaves Libya As Regime Is Targeted.” Britain claims that a training base was also hit as reports say that a top oil official by the name of Sehokri Ghanem, has left Libya. These reports are reminiscent of Britain’s old ties to the region.

In the nineteenth century Great Britain moved into Egypt and made it part of the British Empire. Though it nominally gave Egypt it’s independence after the First World War, Britain continued to call the shots in the region. British Mid-East Headquarters continued to be located in the Citadel in Cairo. The officers continued to live on Geizira Island. This was the base of operations that General Auchinlek, the “Auk”, Wavell, and Montgomery used during the Second World War for their North African Campaign against Mussolini and Hitler. It is where Montgomery won the Battle of El Alamein on November 4, 1942 against Rommel.

Though Britain was formally ousted in 1956 by Nasser, it’s no wonder it is part of the war against Libya. And it’s no wonder the U.S. is now part of it, too. We joined in the ousting of Rommel from North Africa. And it is our fate to follow wherever the British Empire led.

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Archibald Wavell

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Erwin Rommel

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Bernard Montgomery

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Claude Auchinlek

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Dominique Strauss-Kahn was not present at the meeting

Yesterday’s meeting in Brussels of European Finance Ministers ended in a paradox, but the discussion must go on because Greece is a Balkan country and Balkan countries can cause disastrous problems. Serbia led to the start of World War I, and that began the twentieth century decline of Europe. In this case the unraveling of the Greek economy could lead to another financial crisis and further worldwide recession.

European countries are pressuring Greece to make budget reforms and raise cash by selling assets at the same time they debate billions more euros in loans. Greece will probably have to reschedule or reprofile loans, which means they will replace them with new bonds with longer maturities.

The $155 billion bailout from last year was not enough to get through 2012 without private lenders which of course they can’t get. Greece needs 60 billion euros in new loans for 2012-2013, but other countries now want collateral.

Teams of experts, including non-Greeks, have suggested more privitization programs. Greece is resisting politically. They don’t want to sell off bits and parts of their country for cash. Nor do they want to reduce the size of their government. Too many Greeks would lose their jobs.

Greece’s debt is now reaching 375 billion euros, which is 166% of their GDP. But if they restructure their debt three ominous things could happen:

1)Greek banks wouldn’t have sufficient capital

2)There would be no access to financing

3)The situation would spread to the other pigs — Portugal, Spain, Ireland, and Italy.

In an op-ed piece David Wessel suggests that the only solution is more foreign aid for Greece, not loans. Yet in the Northern Tier, in countries such as Germany, this is unpopular.

Germans must make the sacrifice. It will only increase the strength of their currency and their own economic muscle.

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In the Wall Street Journal article from Saturday, May 14, “Greece to Miss Deficit Goal, Complicating Bailout Plans’, we learn that Greece’s budget deficit will decline only slightly in 2011 and barely at all in 2012, causing Germany a lot of soul-searching about what they are willing to do in providing more aid and keeping together their economic sphere.

It becomes clearer every day that Greece will need a new bailout plan to survive through 2012. Their budget deficit in 2011-2012 is 21.1 billion euros or 9.5% of their gross domestic product. The population is not taking the necessary course to make themselves eligible for private loans. For instance, they can’t improve tax collection. Right now Greek bonds are rated as junk. The EU and the IMF must bail them out.

What to do will be at the top of the agenda at the meeting of EU finance ministers this week.

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Meeting in Brussels May 16, 2011

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Germany’s first quarter growth for 2011 was 6.1% annualized (the U.S. was only 1.8%) according to the Saturday, May 14 article in the Wall Street Journal, “Euro Zone Expands At 2 Speeds”. The growth rate for the EU as a whole was 3.3%. The market for German luxury cars in China is big and growing bigger. So is the demand for German machine tools. But in the powerhouse economy of the EU, consumer spending and investment are also up.

But at the same time the economy in Greece lags farther and farther behind its northern neighbors. They haven’t found private investments or jobs to make up for the shrinking public sector. It is the diametric opposite of Germany.

No later than July Germany wants to increase its interest rates to cool off an economy that might overheat. That would be bad news for Greece that needs stimulus and low interest rates.

The danger is not so much that Greece’s failing economy will hold Germany back. After all, the

economies of all the “pigs”: Italy, Spain, Portugal, Ireland, and Greece accounts for only 6% of the EU’s GDP. But there is a real political danger that cuts two ways. First the Germans themselves could get tired of paying for Greece. There could be a taxpayer revolt. The even greater danger is that Greece will drop out of the EU all together because of the unpopularity of the economic measures Germany has decreed. Then the tribute to Germany’s economic might, the euro, will fail.

After the defeats in the two world wars, Germany doesn’t want another failure laid at its door.

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Brandenburg Gate, symbol of Berlin and Germany itself

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Greek dancers

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