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The ESM will be the vortex which swallows Europe (if ratified)

Today it emerged that the ESM (European Stability Mechanism) could later be paying for the €100 billion bailout of Spain’s banking system. This ‘stability’ mechanism, however, has only been ratified by France, Holland and Slovenia – and may never materialise.

The video below is targeted at a German audience, but is still relevant to any European.

That ESM which everybody may think is a cuddly solution to the problem, is in fact a huge Orwellian nightmare. Nobody will be able to sue it or any of its officials, whilst they will have carte blanche to act above the law. Unelected overlord Eurosprouts will be able to impose their will over Europe and have the right to ask for any money from governments, whenever they like, within 7 days. Given such stringent conditions, it is difficult to see why any sovereign nation would want to participate and ratify the proposals. Please correct me if I am wrong (and I suspect I am) but it seems only 3 countries have ratified it so far, and I think it is likely that the pledges for the ESM will never really come to light.

Moreover, any bailout in Europe is also subject to the risks of contagious circular logic. The Eurozone’s members have to stump up the cash to pay into the ESM. But if anyone needs a proper bailout,  Italy stumps up 17.9%, Spain 11.9%, and France 20.4%, of the ESM’s funding. But I have some questions.

A) How is Spain going to be able to afford to fund a bailout to itself, when it inevitably needs one?
B) By paying up for Spain, surely Italy will be pushed over the edge and will need a bailout. How will Spain be able to afford to fund that, given that it has just been bailed out?
C) Then doesn’t this put ‘safer countries’ like France and Germany at risk? If this jiggery-pokery continues with the ESM, they may very well need a bailout themselves – although I don’t see the Euro lasting that long.

To conclude, sovereign bailouts are throwing money down the drain. The ESM is only going strengthen contagion fears because it spreads out the risk amongst already fragile public finances. Therefore if the ESM does get signed into national statute books, it will make Europe far from stable and will be the sinkhole that swallows it up.

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Posted by on June 11, 2012 in Trading Ideas

 

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