The Euro Crisis and the Golden Rule

I’m amazed at how long it has taken our European friends to realize what reality looks like.  It’s as if they got into the Christmas cheer back in 1989 and never got out.  If you recall, that was the year the two different Germanys danced on the wall and all was well with the world.  At that time, the idea was that without a bothersome Iron Curtain messing things up, Europeans could finally learn to live with each other and become the superpower they were always meant to be.  This has been Europe’s elusive dream ever since Hadrian ruled all the good bits of the continent at the high-water mark of the Roman Empire.  The cunning plan was to slowly integrate everything from the North Sea to the Mediterranean and create an economic powerhouse that would fear nothing in its path.  What a difference a generation makes!  These days, the Germans aren’t dancing anymore — and neither is anybody else.  The grandiose schemes of 1989 got waylaid — for good and sufficient reason.  Europe is now on the brink of a catastrophe that would make the fall of the Roman Empire look like a minor inconvenience.  So, after only twenty years to think about it Europeans are suddenly looking around for — as Monty Python once said to an astounded television audience — “Something completely different!”

Even as you read this, Merkel and Sarkozy are discussing (plotting is such a hard word) ways to take over Europe.  In the 3,000 years of recorded European history, there has never been such a reluctant power grab.  Neither one of them wants this (although Sarkozy has that suspect Napoleon thing going on) but at the end of the day, they have no choice.  They have to do it.  It’s either that or there isn’t going to be a Europe to take over.  Time is running out, so whatever they do had better be big and bold and work right out of the box.

You need to understand something about the European situation before you can understand what Merkel and Sarkozy are up against, however.  There’s a difference between the European Union and the Euro zone.  Not all countries in the European Union use the Euro.  Great Britain, Denmark and Sweden among others, still use their own pounds, krone or what have you.  Therefore, their stake in the game is quite different.  Even though their national currency is not going to be at the epicentre of the financial earthquake, the non-euro EU members are obviously going to take a serious kicking if the Greeks, Italians and Spanish hit the fan.  Plus, they’re probably going to be on the hook for any attempted bailout.  You don’t have to be a Euro sceptic to see more liabilities than benefits.  If things in Europe aren’t fixed pretty quickly, there’s a real danger that a lot of people will be wondering just how much this Euro experiment is actually worth and they might even start looking around for the exits.   Merkel and Sarkozy already know that it’s not just the Euro that’s at stake here but the future of the European Union itself.

Merkel and Sarkozy need to forget about integrated economies, long term solutions, ECB realignment, blah, blah, blah, and restore some confidence in the Euro – today.  The Euro is an unusual currency.  Like the magician’s assistant in the levitation trick, there’s nothing holding it up.  Whole books have been written on what the Euro is and isn’t, but they all boil down to the same thing – faith.  The Euro is based on the simple idea that 400 million Europeans are willing and able to pay.  That’s it.  The Euro is in such dire straits right now because nobody believes that anymore.  The big money boys are looking at the balance sheets and thinking they’re about to get left holding the bag — and it’s going to be full of useless paper.  Therefore, like Sunday morning evangelists, Merkel and Sarkozy need to convince them that as long as they keep the faith, they’re not going to go to hell.

The only way they can do that is quit applying billion dollar band-aids and lay down a heavy duty set of rules.  As of this morning, the nations of the Euro zone need to start taking their fiscal marching orders from the bureaucrats in Berlin.  It’s the only way the banks are ever going to refinance the ridiculous mortgage the Europeans have saddled themselves with.  If Germany and her little sister, France, are willing to co-sign an unlimited line of credit to the southern half of the continent — and put up their taxpayers as collateral — they need to have a serious repayment plan.  Otherwise, they are just going to be sucked into the bottomless financial pit the Europeans have been digging down south.  This isn’t about national sovereignty or petty politics; it’s cold, hard economics.  Anything less and the crisis just deepens and threatens the European Union itself.

Merkel and Sarkozy have got to get tough and invoke the Golden Rule: We make the gold; We make the rules.

The European Crisis Just Went from Bad … to Better

Just as we see the Arab Spring turning  brown in the Moslem Autumn, brace yourself because we’re about to experience a cold, hard European Winter.  In the last couple of weeks, our friends, the Euro spenders, have finally woken up to their financial debacle, and nobody’s made the coffee.  Austerity is the watchword, and there’s about to be enough tough love around to make everybody south of the Alps think they’re in rehab – and, to a certain extent, they will be.  There’ll be the usual demonstrations and condemnations, but march and chant all you want, people: the party’s over.  Let the hangover begin!  That’s the bad news.

The good news is for the first time since the EU bailiffs threatened to put a lien on the Acropolis there is actually some light at the end of the tunnel.

A couple of weeks ago, the Greek Tragedy took a definite turn for the better when Papendreou, the Prime Minister, decided to step down and collect his pension — before it disappeared entirely.   Remember, this is the guy who was going to hold a referendum to see if his fellow citizens, rioting in Athens, would vote yes to a couple more brutal kicks in the financial groin.  Not the sharpest skewer in the souvlaki, he was replaced by Lucas Papademos, who — believe it or not — is actually an economist.  Fancy that!  Hiring an economist to deal with a financial meltdown!  Who says the Greeks haven’t done dick since Pericles?

Around about the same time, over in Rome, class clown Silvio Berlusconi was given his walking papers, complete with dancing in the streets.  Apparently, somebody took time away from eyeballing Ruby Rubacuori and took a gander at the books.  As of this morning, Italy is a little over two trillion dollars short of a down payment on a cappuccino.  In other words, they’re up to their Armanis in debt, and this time, bread and circuses aren’t going to save them.  “Bunga, Bunga” retired gracefully, rather than be thrown to the lions, and he was replaced by Mario Monti.  Once again — wonder upon wonders — the guy’s an economist!  He better be a good one.

The third domino to fall happened in Spain on Sunday, November 20th, when Spanish voters returned the right-of-centre Partido Popular to power after a seven year absence.  As you recall (or maybe you don’t) the Spanish electorate tossed the PP out of power in 2004 when the Jihadists made it clear which way they wanted the vote to go — with a couple of commuter train bombings in Madrid.  For the last seven years, Jose Luis Zapatero and The Spanish Socialist Workers’ Party have been running the show with (to be fair) mixed results.  Unfortunately for the socialists, the only results the Spanish are hearing these days are 20% unemployment and a national debt big enough to choke an Andalusian stallion.  Zapatero saw the escritura on the wall and retired from politics.  Mariano Rajoy is in charge now, with a majority in the Cortes Generales and a mandate to clean up the mess.

Suddenly, all of Europe has turned a conservative blue.  (Just a note to my American friends.  The traditional political designations around the world have always been conservative blue and liberal red — just as they used to be in the United States.  It’s only the recent media manipulation of the colour wheel on election night maps that has changed the colours to Red states Republican, Blue states Democrat.  Coincidence? I think not, but that’s fodder for another blog.)

Anyway, as of last Monday morning, every government west of the Volga (with the exception of Slovakia – don’t ask) is either centre-right or out and out right of centre – in a word, fiscally conservative.  Granted, in European politics, right wing doesn’t mean much until you get to the nutsy fringe, but at least these folks understand that if you have two Euros, you don’t spend twelve.  Obviously, the European crisis is so massive even the most conservative government is going to have to tax and spend more than they want, just to keep the wheels rolling.  However, by understanding the simple accounting principle that the books have to balance eventually they may be able to stop the deficit haemorrhage.  More importantly, during the heated discussions between north and south that are about to ensue, with any luck at all, nobody will be throwing their political monkey wrench into the economic machinery.   It helps that, even though these Euro zone leaders aren’t necessarily all on the same page, at least they’re all finally reading from the same book.

Like it or not, if these new governments do it right, it’s going to be a hard, cold European winter. Unfortunately, there isn’t any second choice.  It would be a fatal mistake to think there is.

European Debt: Another Brief History

Standard and Poor’s are at it again.  For the last several months, they’ve been running around the world acting like everybody’s international told-ya-so auntie.  A couple of days ago, they landed in (or on) Italy.  The next thing you know, they’re having a five-star lunch on the Via Veneto and downgrading Italy’s debt rating to extra crispy.  What this basically means is Europe’s third largest economy now has less borrowing power than Slovakia, the agrarian little sister of the Czech Republic.  I’m sure Berlusconi shook himself out of his afternoon nap, give it a WTF and asked somebody (a la Barack Obama) “Who do these people think they are?”  The simple answer is S&P are the canary in the mineshaft and right now they’re gasping for air: pay attention!

Like it or not, the Post World War II European Slumber Party is over.  It was a great time, everybody had fun, but now it’s time to wake up, smell the espresso and go back to work.

In fact, the party’s been over for 20 years.  The alarm clock should have gone off in 1989, when the two different Germanys took turns dancing on the Berlin Wall.  At that time, after more than a decade of relative austerity, the prevailing wisdom was “Wunderbar!  Let’s spend the Peace Dividend.”  So instead of putting a couple of drachmas, liras, pesos or what-have-you aside for the eventual rainy day, Europeans actually started overspending again.  In their zeal to continue creating a second Mediterranean Eden of overlapping social programs, nobody bothered to remember the Peace Dividend was an illusion.  There was no significant amount of extra money available to Europe from cuts in defence spending simply because they’d never paid full price in the first place.  American taxpayers had been footing the bill for European defence ever since the days of Stalin.  Ironically, as Americans forgot about the Cold War and closed up shop on the Iron Curtain, Europeans had even less discretionary cash because they had to start buying their own tanks and helicopters again.  Nor was that the only dividend the Europeans were spending.

From the mid 50s until the Oil Embargo of 1973, there had been an economic miracle in Europe.  Called Wirtschaftswunder in Germany and Trente Glorieuses in France, the western continent from the Brandenburg Gate to the Bay of Biscay was doing business.  Believe it or not, during that time period, Greece’s average annual economic growth rate was 7% and Spain and Italy weren’t far behind.  Western Europe was awash with cash.  Once again, however, nobody bothered to stash a few coins in the cookie jar just in case one day the Saudis might start demanding full price for their oil.  But that’s not the real problem.

With mountains of money and American muscle to keep it safe, the Europeans could indulge every socialist fantasy their intelligentsia had ever imagined — from Karl Marx to Charles Fourier.  Social problems were bottomless pits, education and unemployment were subsidized career choices, government departments were bloated with employees, and wages and benefits everywhere went through the roof.  Money was no object and the Europeans threw it around like rice at a wedding.  This was all fine until King Faisal and his friends decided to cut off the goo that lubricated the wheels of European industry.  As oil prices shot up, European industry began to shrink.  This constricted the tax base and put an even greater strain on the social safety net.  In essence, OPEC outlawed miracles.  Unfortunately, the Europeans didn’t see the writing on the wall — or they chose to ignore it.  When revenues were no longer sufficient to cover their obligations, rather than halt some of their more ostentatious social projects, European governments turned to the banks.  To cover the shortfall they borrowed billions against future revenues.  By 1989 this vicious circle was spinning out of control.  That’s why the illusionary Peace Dividend looked so attractive.

Today, after three generations of entitlement programs, any mention of austerity is met with protests and riots.  The party might be over in Europe, but nobody’s leaving just yet.

So, as they say at the accounting firm of Dewey, Cheatem and Howe, “What’s the bottom line?”  It’s very simple.  If nothing changes, there is no way Greece can ever meet its financial obligations.  They either have to completely revamp their economic structure — or default.  There’s no third option.  Likewise, Portugal and Spain must either drastically curtail their social spending or face the same problem.  The IMF recently said that this is a very volatile time, and if everybody isn’t super careful, European debt could slide the entire world into recession.  That’s like saying Chris Rock and Russell Peters are a couple of funny guys and if you’re not careful you could end up laughing.  Recession is the given right now; the only questions are how deep and how long.  Guys like Berlusconi need to tear themselves away from politicking for a couple of minutes, listen to what the money boys like Standard and Poor’s have to say, and act accordingly.  If they do, the recession will be short, sharp and painful.

If they don’t, it’s going to be long, hard and ruinous.