The Euro bailed out with Islamic finance
Philip Wren considers whether interest-free Sharia finance — akin to pawn-broking — could be used by European governments as the 'solution of choice' in the present crisis.
by Philip Wren
first published 29/08/11
We are unlikely to see the above headline. But it could be the reality facing Europe.
The Eurozone is in crisis.
As I write the leaders of the Eurozone economies have just agreed a response to the Greek debt crisis. The package includes a mixture of loans, guarantees and a selective default on her debts. This means that Greece will force private lenders to accept a 30 year payback period on 10 year bonds. The package will give Greece some short term relief.
With other member states in trouble due to the accumulation of debt the Eurozone nations cannot afford to keep propping up the weaker economies.
In the longer term if Greece does not get her government spending down the next crisis will be far worse. It will be virtually impossible for her to borrow money to keep the government afloat. Without Eurozone support Greece will face economic collapse.
George Osborne and others have suggested that the European Central Bank consolidates member state's borrowing by creating 'euro bonds' as a way of shoring up the most indebted nations. This will push up the cost of borrowing for the richer nations but allow the indebted nations to borrow from the European Central Bank at lower interest rates than they are currently being charged.
For a euro bond to become a permanent part of the European Union, it needs German backing. Germany is refusing to commit to a permanent common European bond market until there is a mechanism to enforce budget compliance in member states. Without budget compliance by the poorer nations the cost of borrowing for Germany would become unsustainable.
Across the Atlantic American officials are watching closely. On the global stage, U.S. treasury bonds are the unrivalled debt marketplace in terms of volume and liquidity. Consequently, the dollar is used as the world’s reserve currency. This reserve currency status is why America can have such low interest rates, why it is so easy for Americans to get loans, and why the Federal Reserve can get away with creating money out of thin air so that Congress can spend money it does not have. It is a big factor supporting America’s debt-based economic model and consequently its standard of living.
US bonds hold their position because there has not up to now been an alternative. If Euro Bonds are adopted as the way out of the euro crisis, for the first time, U.S. treasury bonds will have a real and potentially lethal competitor, and the world will finally have a true alternative to the dollar for a reserve currency. As soon as investors see a safer place for their money they will flee the USA leaving it with a mountain of debt it cannot pay. Greece will be saved but the USA will fall.
There is another solution at hand. It’s called Sharia finance. Under Sharia interest is not paid against a loan. Instead assets are sold to the lender. The Sharia agreement sets a price at which the borrower will buy back the asset after a fixed time. The buyback price will be the equivalent of the compound interest added to the initial sum over the period. If the borrower is unable to buy back the asset it will belong to the lender.
This is exactly the same system as that operated by a Pawn Broker. The Pawn Broker was the place of last resort for the poor. The rates charged were exorbitant leaving the poor even poorer. Desperate politicians facing angry populations will take desperate measures.
Sharia finance provides a source of ready finance without the immediate burden of interest rates and leaves the problem of repayment to successor governments. If the repayment is not made the assets will be forfeited. Entering such an arrangement requires financial discipline.
It was the lack of financial discipline which got Europe into this mess. Spending wins votes. How many politicians can resist the temptation to use a breathing space to appease public demands?
I believe that the Revelation 18 prophecy about Babylon the Great is fulfilled in the Western world. ‘Christian’ Europe is the fulfilment of the harlot kingdom of this world. Islam is rising as the beast empire. In Revelation the beast strips the harlot Babylon the Great of her wealth. As governments fall for the easy money of Sharia loans, Islam will have created the perfect vehicle for ravaging the West and leaving it impoverished fulfilling Revelation 17:16.
Ed footnote: See also previous article: Banking: the future is Halal and particularly the concluding section sub-titled 'Government by crisis'.
Philip Wren and Ken Kite publish the 'Trumpet Sounds' newsletter: produced over a period of 20 years as a quarterly newsletter carrying comment on world events in the light of scriptural prophecy.