Political
upheaval has hit Finland, and it’s merely a foreshadowing of bigger changes
ahead. The core issue is whether Finland ought to be paying for bailouts for
other EU states. In reaction to establishment support for the bailout, voters
ousted the pro-bailout ruling party and gave an upset victory to the
bailout-critical conservative party. Against every expectation, the eternal
rule of the social democrats is at an end.
But most striking of all are the gains made by a
previously invisible party called True Finns. This is the only party to take
a hardcore position: no bailouts at all. It also so happens that this party
is predictably nationalist on issues of trade and immigration. But
that’s not the source of the appeal. The bailout is what is on
everyone’s mind. And you know that the anger must be palpable if it fired
up the usually sleepy world of Finnish politics.
In the sweep of history, few issues are as
politically volatile as tax-funded bailouts of foreign countries, especially
during difficult economic times. It’s a policy that provokes dramatic
political change. The 20th century’s most famous case was in interwar
Germany, when nationwide resentment against payments to conquering allied
nations ushered in National Socialist rule.
It should be no surprise that over-taxed Finns have no
interest in sending their tax dollars to bail out the banking industry of
Portugal, a country that is 2,500 miles and two days travel away. Even
governments should have learned long ago that it is never a good idea to
enact these sorts of policies. In this case, however, every EU nation is
bound by a political contract to bail out any other; the bailouts are
embedded in the very structure of how the political, financial, and monetary
sector is currently structured.
The entire EU system is afflicted with the paper
money disease. It creates a boom that balloons the banking sector, allows
politicians to spend wildly, and encourages private enterprise to expand
operations in an unsustainable way. Then the bust comes and everything falls
apart. Government revenue crashes, banks are threatened with insolvency, and
mass bankruptcies are apparent everywhere.
There is a fork in the road, one branch labeled
liquidation and the other bailout. When the fiat money is available—and
with their favorite interest group, the banking establishment, warning of the
end of the world—guess which way the politicians choose? This is why
member states are being told that they must cough up $129 billion (it will be
more) to save Portugal from its own problems.
It’s not that politicians all over Europe (and
the US) love Portugal so much that they are glad to lavish it with more paper
money. The real fear is contagion. If Portugal goes, Spain and Italy are
next, and then the whole shaky system comes down, first in Europe, then in the
UK, and finally in the US. This is the scenario that allows politicians once
again to paper over the problem rather than confront it.
Wasn’t the invention of the European Central
Bank supposed to control credit expansion in Europe? Philipp Bagus, in his book The Tragedy of the Euro, identifies a fatal flaw. There is nothing that the
ECB can do, even if it wanted to, about sovereign state finances or the
fractional-reserve banking system that feeds on government-created debt. The
ECB can control money injections, but it can’t stop debt creation or
the banks that thrive on it.
This debt creation generates its own unsustainable
boom. A country’s finances then correct to reflect reality and the
banking system comes under pressure. Then the bailouts begin. What ends up
happening is that the (relatively) frugal states in the European Union
subsidize the less frugal ones. There is moral hazard embedded in the very
structure of the entire system.
Nothing is going to fix it. Bailouts are only
temporary aids until the next round of credit-fueled profligacy. And there is
absolutely nothing that the ECB can do to stop it. Every profligate country
knows that it is too big to fail, and that it enjoys presumed access to the
financial resources of every other state in the EU. So the result is ongoing
and worsening bailouts, leading to total bankruptcy.
For this reason, everyone knows that there is far
more at stake than just Portugal. The entire system of European finance and
monetary arrangements is broken. It can’t be repaired with patchwork
bailouts. At some point, the flaw in the system will have to be fixed (via a
hard currency) or there will be a reversion to sovereign paper currencies and
the Euro will be chalked up as yet another failed experiment in monetary and
regional planning.
Keep in mind that this is the third country to be
bailed out recently. Ireland and Greece came first. And those bailouts barely
worked. Once we plough through the smaller countries, we will move on to the
larger countries. And there is not enough money, absent hyperinflation, to
bail out Spain, much less Italy.
The European Central Bank, which has been less
irresponsible than the Fed in recent days, is the first world central bank to
do what should have been done three years ago. It is raising rates with the
intention of tightening money. The Fed should and must do the same thing. But
there is a problem. If real interest rates reflected financial reality
– with no presumed bailouts and no power to create new money –
they would be sky high.
The Portugal case and the Finnish reaction should
serve as a wake-up call. All these bailouts and stimulus packages cannot hide
the fact that the governments and banking systems of the US and Europe are
fundamentally bankrupt, sustained only by the power to create money out of
thin air. Each intervention is working to buy time but not to deal with the
fundamental problem. And each time when the problems return, they are worse
than before.
It doesn’t take a True Finn to recognize the
injustice of bailouts for foreign governments. Neither nationalism nor
bailouts will fix the real problem. We will eventually find our way back to
sound money. But it is going to be terrible slogging, and real convulsions,
along the way.
Llewellyn H. Rockwell, Jr
LewRockwell.com
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