Nothing to see here... just the collapse of the euro... and maybe the entire global economic system

Hey, remember my last bloggingheads, when I went to the 1930s analogy to describe the current problems in the global political economy?  Well, that was a few days ago, and my, how things have changed -- to make that 1930's analogy even more powerful.  The eurogoggles metahor may be coming to an end -- because the situation is so dire that even the cheeriest summit won't alter perceptions in financial markets. 

After a week of gyrating europolitics on the Greek bailout and meaningless G-20 summitry, markets and media will be focused on Italy this week.  This matters -- for both Europe and the world, Greece is a diverting sideshow compared to a major financial collaspse in Italy.  The pressure on Italian PM Sylvio Berlusconi to resign have gotten so loud that he had to take to his Facebook page to say, "The rumors of my resignation are groundless."   New rule of thumb:  any time a politician follows Sarah Palin's lead, there's going to be a problem. 

The Daily Telegraph's Ambrose Evans-Pritchard explains the eurofarce that is currently playing out

As of late Friday, the yield spread on Italian 10-year bonds over German Bunds was a post-EMU record of 458 basis points. This is dangerously close to the point where cascade-selling begins and matters spiral out of control.

The European Central Bank has so far bought time by holding a series of retreating lines but either it has reached its intervention limits after accumulating nearly €80bn of Italian debt, or it is holding fire to force Silvio Berlusconi to resign – if so, a foolish game.

The ECB’s hands are tied. A German veto and EU treaty constraints stop it intervening with overwhelming force as a genuine lender of last resort. The bank is itself at risk of massive over-extension without an EU treasury and single sovereign entity to back it up.

This lack of a back-stop guarantor is an unforgivable failing in the institutional structure of monetary union....

The spreads on EFSF 5-year bonds have already tripled to 151 above German debt, leaving Japan and other early buyers nursing a big loss. The fund suffered a failed auction last week, cutting the issue from €5bn to €3bn on lack of demand.

Gary Jenkins from Evolution Securities said the “frightening” development is that the EFSF is itself being shut out of the capital markets. “If it continues to perform like that then the bailout fund might need a bail out,” he said.

Europe’s attempt to widen the creditor net by drawing in the world’s reserve states evoked near universal scorn in Cannes and a damning put-down by Brazil’s Dilma Rousseff. “I have not the slightest intention of contributing directly to the EFSF; if they are not willing to do it, why should I?”

Europe is resorting to such antics because its richer states – above all Germany -- still refuse to face up to the shattering implications of a currency that they themselves created, and ran destructively by flooding the vulnerable half of monetary union with cheap capital.

Simon Johnson is, er.... less than optimistic about these developments: 

MIT Sloan School of Management professor Simon Johnson didn’t equivocate on the perils of the current global economic environment. “We have built a dangerous financial system in the United States and Europe,” said the former chief economist at the International Monetary Fund. “We must step back and reform the system.”

Professor Johnson cited alarming parallels with October 1931, when “people thought the worst was behind them, but the smart people were wrong and instead the crisis just broadened.”  (emphasis added) 

I've said it before and I'll say it again:  any time the global economy is counting on Sylvio Berlusconi to do the right thing is not a good time. 


Daniel W. Drezner

Michael Goldfarb earns a Vizzini nomination

The Weekly Standard's Daniel Halper reads through the fine print of a G-20 pool report: 

President Obama] entered the room at 1:15 and took to his left, heading to Angela Merkel and Nicolas Sarkozy. They chatted for a few seconds before British Prime minister David Cameron joined them. Hard to understand what they were saying amid the cameras noise. POTUS then took a stroll to Australian Premier Julia Gillard who got a hug as European president Herman van Rompuy, European Commission Jose Manuel Barroso and Turkish PM Recep Tayyip Erdogan were watching. Eventually the Europeans got a handshake but Erdogan got the hug treatment....

Isn't this whole scene pretty standard for President Obama? The Europeans get a handshake and the Islamist Turkish prime minister Recep Tayyip Erdogan gets a hug (emphasis by Halper).

Michael Goldfarb -- Halper's colleague at the Weekly Standard -- goes further, tweeting this anecdote as an example of Obama "hugging enemies, abandoning allies." 

Yeah, I can't believe that Obama is hugging the personification of an America enemy like, like... a NATO treaty ally's head of government.  The same country that helped to bankroll the Libya anti-Gadhafi movement and is now creating an enclave for the Free Syrian Army

Yes, Erdogan has clearly made life difficult for another ally -- Israel. On the other hand, lots of America's allies make life difficult for other American allies (see: Gibraltar). That doesn't mean Turkey automatically gets its ally label revoked. If you look at the larger balance sheet of American interests, Turkey under Erdogan has been neither an enemy like Iran nor a frenemy like Pakistan.  It's been occasonally aggravating, but really, when it comes to the global political economy, western European leaders like Angela Merkel and Nicolas Sarkozy have been way more aggravatiing. 

So, yes, Michael Goldfarb has clearly gone Vizzini on the word "enemy." 

To take a step back here, however, Goldfarb's language raises an some interesting observations.  first, there's an awful lot of "friend/enemy" distinctions being made among GOP foreign policy commentators.  That's the one takeaway from Herman Cain's foreign policy statements to date.  The distinction sometimes useful -- from an American perspective, India is a friend but not an ally, while Pakistan is the reverse.  Still, by and large, friends and allies do overlap a lot.  Does this kind if language indicate a new GOP embrace of Carl Schmitt's worldview

Second, to be blunt about it, is Israel now America's ally uber alles?  If other countries disagree with Israel, does that mean, in Goldfarb's eyes, that they no longer qualify as either friend or ally?  Are there any other of America's friends that fall into this super-special status?  I really want to know.