The Dissolution of Europe Has Begun

 | Oct 25, 2011 | 4:45 PM EDT
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The events unfolding in Europe are not principally financial, economic or political. They are social.  

The damage being caused to the union the Europeans have attempted to cultivate since the end of World War II may be irreversible. That's because of the way the political leaders are individually and collectively dealing with this crisis. And this may indicate the beginning of the end of the union.

Plato discussed these kinds of proceedings in "The Republic." Plato and Thrasymachus were debating the nature of justice. Plato contended that "justice can be known." Thrasymachus responded more pointedly that "might makes right, and justice is the will of the stronger."

This is the essence of what is unfolding in Europe. Most -- save for, say, the European Union referendum debate and vote in the House of Commons on Monday -- are not asking if they want to be in a union or not.

If the answer is "yes," then actions taken need to align with that goal. If it's "no," then the actions taken with respect to breaking the union up need to be pursued swiftly.

Frankly, the actions do not match the words.

At a time when leadership, wisdom, foresight and guidance are necessary to navigate the crisis, and to remind the collective people of Europe as to their common goals, these qualities are lacking. It is a vacuum.

When Britain faced an existential crisis during World War II, Prime Minister Winston Churchill delivered his famous rallying speech with the words, "Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."

This is the kind of leadership Europe needs now. And the politician with the responsibility for providing that leadership to the European Union and to the world is German Chancellor Angela Merkel.  

German banks are the creditors to the rest of the Union's debtor countries and banks. The rest of the E.U. can do nothing to resolve this crisis without German acquiescence. And the crisis cannot be resolved with the result of continued unification without losses being incurred by German banks, investors and citizens.

Instead of leading the Union -- or even attempting to -- Merkel has kicked the decision on the proposed resolution to the German Parliament and to the citizens, who are scheduled to vote tomorrow.

This is akin to Caesar allowing the thronged masses to decide through their shouting whether a gladiator was to live or die. It is an abdication of her responsibility and a humiliation of the rest of Europe.

It creates mistrust among the people of Europe for each other and most importantly for Germany. From an economic standpoint, these actions, as well as those taken by the other equally irresponsible leaders of Europe, destroy the confidence necessary to make any resolution viable now.

The collective confidence in the financial plan by everyone in Europe and in the rest the world was the leverage necessary to make any plan work. They don't have the financial capital or the ability to leverage it to achieve a large enough sum of money necessary to overcome the distrust and crisis in confidence their actions and lack of leadership have already produced.

At this juncture, it does not matter whether or not the German Parliament approves any plan. I will note for the record that I do not expect them to.

But the dissolution of the European Union has already begun. 

The next phases will be sovereign defaults starting in Greece and then extending quickly to Ireland, Portugal, Italy and Spain.

The sovereign losses will render the European money-centers insolvent, including the German and French banks, necessitating their failure or recapitalization. The ones that are recapitalized will be nationalized as private capital from around the world will not trust the European governments.

From there, we will see a cascading series of defaults into U.S. money-centers requiring their recapitalization or failure too. The process in the U.S. may be contained to Bank of America (BAC) and Citigroup (C). Unlike 2008, though, it is not politically viable to bail out these institutions with another TARP-like process. They would likely be supported by the Treasury until they could be absorbed by other institutions. 

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