Monday, March 5, 2012

Everyone wants to be flexible now

Let’s see how this works out…

First, Spain defies the EU and demands additional “flexibility” to run higher deficits than it had agreed to just days earlier. The EU was outraged, but ultimately powerless to do anything about it.

Now the region of Cantabria is asking the central government for more “flexibility” in running a higher deficit. At the same time, cuts are now called “flexibilización del déficit”, so who knows what they are asking for...

My guess is that the next year will see an orgy of borderline-legal money printing in Spain as the government pawns every turd it can lay its hands on to the European Central Bank. At the same time, everyone with half a brain and a positive bank balance will transfer their money out of Spain.

This creates a massive imbalance in the Target2 payment system, where Germany is already “owed” 500 billion euros by the rest of the Euro-system. There is no theoretical limit to this number, but at some point it will start creating inflation in Germany. This might actually not be so bad, since by causing inflation in Germany, it would reduce the need for other Euro members to deflate costs/wages. Unless the hard-currency fanatics flip out and do something stupid of course (like sending in the Luftwaffe).

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