One of these days, the Germans are going to get fed up and quit forking over Euros to every Juan, Liam and Spiros who comes wandering by with a sob story. Lately, Angie Merkel has been shovelling money off the prosperity truck like it’s Weihnachten; unfortunately, the German taxpayers haven’t been told they’re Santa Claus. When they find out, there’s going to be hell to pay. Meanwhile, across the Rhine, Sarkozy is robbing Peter to pay Papandreou by convincing the French private financial sector to bankroll his vision of stability in the European Union. This isn’t very smart. Remember, up until recently, Les Trois Grands (Credit Agricole, BNP Paribas and Societe Generale) were all government institutions, so if things start to go bad for the banks it’s going to be the Palais Bourbon who gets to bail them out – on the backs of les taxpayers francais, I might add. I’m not pointing fingers, but something is rotten in Europe and this time it isn’t in Denmark.
The problem with economics is it’s not sexy. A bunch of old men sitting around a conference table dividing up the spoils, just doesn’t make headlines the way a good riot does. Bombs make better copy than balance sheets because, in general, people think economics is dull, complicated and just a little bit icky. The stereotypical international banker is not somebody you want to spend an isolated weekend in the country with. The result is most people don’t know how money works. They believe it’s some magical thing that rich people use to get richer. Not so! International billions work the same way as your lunch money.
All economics is based on faith. Here’s the beer league version. You don’t have to push a wheelbarrow full of money around because you’ve got a credit card. It’s a wallet-sized, unsecured short-term loan. (By the way, despite rumours to the contrary, that’s all it is.) McDonald’s gives you a Big Mac and fries because they believe the credit card company is going to give them money. The company, in turn, pays McDonald’s because they believe you’re eventually going to repay the loan. You get your lunch, McDonald’s get its money and you pay the accumulated bill at the end of the month. Everybody’s happy. The whole system is based on everybody’s rock solid faith in your ability to pay. It’s that simple.
Chopped down to its core, international finance works the same way. The world monetary system is based on everybody’s faith in the local taxpayers’ ability to pay. Countries borrow money. They repay it back over several years from the taxes they collect. (That’s the only income they have.) Again, everybody’s happy – as long as the system works. When it doesn’t, things go bad — real fast.
The situation in Europe these days is several countries have been basically buying too many Big Macs. They’ve been using their national credit cards promiscuously — way beyond the ability of their citizens to pay. For example, this current crisis in Greece stems from the fact that they owe nearly half a trillion dollars — with no foreseeable way to pay it back. The banks have lost faith in the Greeks. They want their money — yesterday. This is where things get complicated because — if Greece goes bust — nobody’s going to repossess the Acropolis and call it square. No, the money disappears: along with several huge banks, the financial structure of Europe and possibly the Euro itself. The sub-prime mortgage crisis in America will be a surfer’s wave compared to that tsunami.
Enter Merkel and Sarkozy, who have a vested interest in keeping Europe afloat. They’ve told the banks, “Okay, you don’t have faith in the Greeks anymore, but you still trust us. We’ll guarantee the loans and we’re backing that up with our taxpayers.” This is great – problem solved — except for one small flaw. The EU has already done this twice. In November, 2010 Ireland went bust (to the tune of 100 billion) and in May, 2011, Portugal did the same (with a 78 billion debt.) Both times, the EU, led by Merkel and Sarkozy, stepped up and bailed them out with guaranteed loans. French and German taxpayers woke up this morning on the hook for over 50 billion dollars in other people’s debts. Not only that, but their banks have guaranteed the same amount again. And that’s just in the short term. There’s more to come later. Trust is not an infinity commodity. Even the stupidest of the profit-and-loss boys are getting gun shy about throwing more Euros at this mess. But here’s the real kick in the ribs. Waiting in the wings is Italy, up to their Armani suits in unsecured loans, and Spain (Europe’s fourth largesteconomy) equally in hock, with a 27% unemployment rate. Their taxpayers couldn’t pay even if they wanted to.
Bluntly, the ship is about to hit the sand in Europe. At some point, financial institutions are going to lose faith in even the Germans’ ability to pay. Long before that happens, the Europeans are going to have to tighten their belts — buckles to the backbone. The quaint idea that you can eat Big Macs all day on somebody else’s Euro is over. The Europeans have been out to lunch for a long time, and now the bills are coming due. They need to become financially responsible first thing tomorrow morning because one of these days the German taxpayers are going to wake up and say, “Was ist los? I didn’t sign on for this.” And that will be the end of everything.