EURUSD is sliding  in early Asian trading after Greece' s government is reportedly planning to  forego its next bailout payment  (of around EUR7bn) if no debt relief is offered by creditors (thus leaving it likely to default on its next round of repayments).

Bloomberg reports, Greece&rsquo s government preparing to possibly go without next bailout payment if creditors don&rsquo t agree on debt relief for the country  according to German newspaper Bild (without saying where it obtained the information).

While probably just another negotiating step, it is weighing on EURUSD.

 

Authored by Simon Black via SovereignMan.com,



In the late 1760s and early 1770s,  the government of France was in a deep panic.

They had recently suffered a disastrous and costly defeat in the Seven Years War, and the national budget was a complete mess.

France had spent most of the previous century as the world&rsquo s dominant superpower, and the government budget reflected that status.

From public hospitals to shiny monuments and museums, social programs and public works projects, overseas colonies and a huge military, France had created an enormous cost structure for itself.

Eventually the costs of maintaining the empire vastly exceeded their tax revenue.

And by the late 1760s, France hadn&rsquo t had a balanced budget in decades.

Debt was ballooning, interest payments were rising, and the government of Louis XV was desperate to do something about it.

There&rsquo s a famous story in which the Comptroller-General of Finances  summoned all the government ministers to make deep budget cuts.

But no one could come up with anything substantial.

The overseas colonies were too important to cut.

And they couldn&rsquo t cut public hospitals&hellip because too many people were now relying on them. Similarly they couldn&rsquo t cut veteran pensions either.

At the end of the session they could hardly find anything to cut that would make a meaningful difference.

All of their fancy programs and benefits had become too ingrained in society at that point and any cut would have proven politically disastrous.

I thought of this story earlier this week when the US government released a sweeping budget proposal that aims to cut the deficit over the next ten years.

In fairness I&rsquo m always happy to see any government cutting spending.

But before uncorking the champagne bottles it&rsquo s important to understand some basic realities:

The budget slashes $3.6 trillion in spending through 2028 while proposing zero cuts to Defense, Social Security, and Medicare.

And that&rsquo s the entire point: just between those three programs, plus paying interest on the debt, the US government already spends MORE than it collects in tax revenue.

In 2016, for example, the government spent $2.87 trillion on Defense, Social Security, and Medicare, plus an additional $433 billion paying interest on the debt.

That totals over $3.3 trillion, which is more than they collected in tax revenue.

In other words, they could cut EVERYTHING ELSE in government:  Homeland Security, national parks, funding for the arts, the Department of Energy. Everything.

And there would still be a budget deficit.

This is the most important thing to understand about US federal government spending:  the built-in costs are so extreme that they can&rsquo t possibly make ends meet.

And the problem becomes worse each year.

Every single day, thousands of Baby Boomers join the ranks of Social Security and Medicare, which only adds to those programs&rsquo costs.

This isn&rsquo t some black magic prediction the Social Security office has precise data on how many people were born in 1952, 1953, 1954, etc.

So they know with a high degree of certainty how many people will be receiving benefits this year, next year, and the year after that.

The numbers just keep going up.

Point is, if they don&rsquo t cut Social Security and Medicare, nothing else in the budget really matters.

All of the cuts they&rsquo re proposing are financially trivial&hellip it&rsquo s like showing up to the hospital with stage 3 prostate cancer and asking to get a cavity filled.

The more they delay the difficult choices, the greater the destruction becomes.

Spending will continue to exceed tax revenue, which means the debt will continue to rise (and interest payments continue to increase).

This cycle never ends.

The big, giant hope right now is that they&rsquo ll be able to engineer gravity-defying economic growth, which should theoretically increase tax revenue.

Again, this is a nice idea.

But their projections are extremely unlikely.

Looking back over the last 30-years, the average annual increase in real GDP per capita is just 1.5%.

The government&rsquo s new proposal is based on the US consistently achieving 3% growth year after year after year.

Even during the roaring 90s there were only three times in which that figure was over 3%.

So this is extremely unlikely.

But even if by some miracle the economy grows consistently by 3%, it still doesn&rsquo t address the government&rsquo s $46+ trillion problem with Social Security and Medicare.

Right now based on their own calculations, both programs are going to run out of money in a little more than a decade.

And they estimate the long-term costs of the program exceed revenue by more than $46 trillion.

(To see for yourself, refer to page 61 from the government&rsquo s own financial statements,  available here. Note how the estimates get worse each year.)

Look, it&rsquo s nice to be optimistic and hope for the best. And any attempt to cut the deficit is certainly better than adding to it.

But it&rsquo s dangerous (and foolish) to presume that everything is going to work out OK just because some rosy projection says so.

The best-case scenario is that they buy themselves a little bit of time.

But the most likely result is still the same: default.

The US government has $20+ trillion in obligations to its creditors, and tens of trillions more in obligations to its citizens.

Simply put, the government has too many obligations. And their only way out is to walk away from some of them.

This means default.

Given that the US dollar and US government debt underpin the global financial system, defaulting on their creditors would likely cause a worldwide panic that would make the 2008 crisis look like an afternoon picnic.

Meanwhile, defaulting on their obligations to citizens entails deep cuts to&hellip you guessed it&hellip Social Security and Medicare. The younger you are, the more you can forget about counting on these programs as you grow older.

 

In the end it was not mean to be. As  discussed on Friday,  during Trump' s first G-7 summit, world leaders including German Chancellor Angela Merkel and new French President Emmanuel Macron, had hoped to persuade the the US president to endorse the Paris Agreement climate pledge to fight global warming. By the end of the summit - held at a luxury hotel in Taormina, Sicily that was once a Dominican monastery and base for the Nazi air force during World War Two - they realized they had failed, as Trump " underscored his determination to break the global mold" by  refusing to follow  the Group of Seven line not only on global warming but also by resisting measures on trade.



Furthermore, in  what was described  as an " unprecedented step" , the final G-7 communique gave the U.S. its own section to say that it is &ldquo undergoing a review process&rdquo and is unable to join in the discussion, an official cited by  Bloomberg said. As a result while the US will remain excluded from the final affirmation, the other six, call it the  G-6,  will recommit to the Paris Agreement on climate change, which Trump tweeted Saturday he&rsquo d come to a decision on next week.

Needless to say, Merkel who had hoped to leave the Saturday summit with the G-7 agenda endorsed by everyone, including Trump, was furious at the US president.

&ldquo The whole discussion about climate has been difficult, or rather very unsatisfactory"   German Chancellor Angela Merkel told reporters Saturday. " Here we have the situation that six members, or even seven if you want to add the EU, stand against one.  That means there are no signals until now whether the U.S. will remain in the Paris Agreement or not. We have therefore not talked around it but made clear that we the six member states and the EU remain committed to the goals of the agreement.&rdquo

The unhappy German continued: " The fact that we have not been able to make progress here is of course a situation in which you have to say that there is no common support for an important international agreement. This Paris Agreement is not simply any old agreement, but it&rsquo s rather a core agreement.&rdquo

She concluded by noting the unprecedented breach of agreement within the ranks, perhaps a first in G-7 history  &ldquo There is right now no agreement. But we have made very clear that we are not moving away from our positions.&rdquo

Moments later, the final declaration released a just as stunning statement, which said that the U.S. was " not in a position to join consensus" on climate change.

To be sure, its wasn' t just Merkel who was displeased with Trump.  According to Politico, while he avoided any major gaffes or serious diplomatic breaches, Trump&rsquo s lack of rapport with European leaders raises serious questions about his ability to effectively team up with critical U.S. allies.

&ldquo Like when there&rsquo s a new strange kid in the class nobody likes,&rdquo   said a senior EU official who was briefed on the closed NATO meetings in Brussels. &ldquo You behave civilly when teachers (media) watch but don&rsquo t spend time with him in private because he&rsquo s so different.&rdquo

* * *

Trump' s inability to integrate with European leaders aside, there was at least some G-7 concensus on trade, after government officials were said to have found an agreement after haggling over wording on protectionism and reciprocal benefits,  Bloomberg reported. Technical negotiations had stretched until 3 a.m. in Taormina to try to reconcile Trump&rsquo s &lsquo America First&rsquo approach with the other leaders&rsquo commitment to open markets. The result is a reference to combating protectionism to be included in the final text, according to two of the officials.  Still, said the third, the document in its current draft clearly falls back by comparison to earlier G-7 communiques.

The leaders &ldquo found a reasonable solution&rdquo on trade that commits to a rules-based system, Merkel said. &ldquo We want to make the WTO successful,&rdquo she said.

Speaking to reporters on the G-7' s trade decision, Merkel said &ldquo we had very tough discussions about trade. Here I think we have found a reasonable solution. We commit ourselves to a rules- based trade system. We want to make the WTO successful. We will together keep our markets open and will move against protectionism, but will at the same time fight against unfair trade practices. This is also in the German interest when I think about the question of steel."

According to  Bloomberg, the discussions, described by Merkel as &ldquo very intense&rdquo late on Friday, " underscore the Trump administration&rsquo s decision to break with the established order honed over decades. Trump told his fellow leaders on Friday that he had campaigned on a platform of protecting U.S. jobs and would act accordingly, according to the officials, all of whom asked not to be named discussing the private meetings."

But the best indication of the hit globalization took over the past 48 horus, was the actual content of the final G-7 communique,  which was just six pages long compared to 32 pages last year.  While much was dropped from the final draft, the text will contain a passage on migration, which it refers to as &ldquo human mobility." It includes a sentence which says that nations also have the right to protect their security, while observing human rights.

 

 

A day after Trump stunned his fellow NATO leaders,  shoving one of them  out of the way for a photo-op and demanding that they " must do more" to offset defense costs which are mostly borne by the US, Trump lobbed another bomb at the European center-right consensus by renewing his attacks on the German auto industry during a closed door meeting with two high-ranking European Union officials, according to a report in  German magazine Der Spiegel, that was picked up by  Bloomberg  and  CNBC.

Citing unidentified attendees,  Spiegel quoted Trump as  saying that &ldquo the Germans are bad, very bad&rdquo   and adding &ldquo look at the millions of cars that they sell in the U.S. Terrible. We&rsquo re going to stop that.&rdquo The comments were said to have been made during a closed-door meeting with the EU President Jean-Claude Juncker and the European Council President Donald Tusk, who reportedly both stood up for Germany, according to  CNBC.



Trump administration officials immediately went into damage-control mode, even as Juncker said the reports of the comment in question had been exaggerated. National Economic Council Director and former Goldman Sachs President Gary Cohn clarified that the US has concerns with the US-German trade balance, not with Germany itself.

" He said they&rsquo re very bad on trade, but he doesn&rsquo t have a problem with Germany. He said his dad is from Germany. He said, &lsquo I don&rsquo t have a problem Germany, I have a problem with German trade' ," according to Bloomberg.

The German trade surplus rose to a record &euro 235 billion ($284 billion) last year,  while the US trade deficit widened  in January to its highest level since March 2012.  Excluding the EU, Germany is the third largest exporter in the world, after China and the US.

Shares of German automakers were down slightly in Frankfurt trading following Trump&rsquo s comments,  which apparently reminded investors of his January threat to slap BMW AG with a 35% tariff.

Trump reportedly tried to negotiate a bilateral trade deal with German Chancellor Angela Merkel when she visited Washington in March,  according to CNBC.  But Merkel insisted that all trade deals with the EU must be made unilaterally.

Following his meeting with Merkel back in March, Trump claimed that the Germans owe &ldquo vast sums of money&rdquo to NATO, and  that the US &ldquo must be paid more&rdquo for the defense services it provides to Germany.

To be sure, Trump wasn' t the first U.S. leader to complain that most NATO nations, including Germany, weren&rsquo t meeting the alliance&rsquo s goal that members spend 2% of their GDP on defense. Germany spends about 1.2% currently.



In fact, none other than President Barack Obama in 2016 said in an interview with The Atlantic about his foreign policy doctrine that &ldquo free riders aggravate me.&rdquo