Meltdown in the EU , By Mike Whitney

[Crewleader]

Weekend Edition
May 21 - 23, 2010

What Happens When Deficit Hawks Set Policy
Meltdown in the EU

By MIKE WHITNEY

Global markets have plunged for more than a month, wiping out more than $5.3 trillion in total market value. Ostensibly, the catalyst was Greece's large deficits, but that's only part of the story. Under the terms of the Maastricht Treaty, (aka--the Treaty on European Union) EU countries are not allowed to exceed the treaty's 3 per cent ceiling on fiscal deficits. The nonsensical treaty basically repeals the business cycle by edict. Are recessions forbidden, too?

Sanctimonious German bureaucrats and heads-of-state have taken up the cause of fiscal probity and turned a thoroughly-manageable matter into a full-blown crisis that could break up the EU and drag the world back into deep recession. Keep in mind, Germany has been the main beneficiary of Greek deficits as reflected in their bulging surpluses. One does not exist without the other; and as Keynes pointed out, surplus countries increase global instability by exerting "negative externality". That hasn't stopped German media from finger-wagging at their "spendthrift" neighbors to the south.

Now markets are in a frenzy; volatility has skyrocketed and gauges of market stress (Libor) are steadily rising. Interbank lending has begun to slow. Greek deficits have uncovered the systemic-rot in the EU banking system which is overloaded with garbage assets and non performing loans, only the EU does not have the fiscal/political infrastructure in place to guarantee the dodgy paper. So the pressure on the banks continues to grow and the prospect of another Lehman crash looms larger by the day.

http://www.counterpunch.org/whitney05212010.html