I try to avoid as much as possible making predictions. However, there is one prediction I am fairly comfortable making, and that is that there is virtually no chance of the EU nations getting together to form a fiscal union.
A fiscal union in Europe would involve a pan-European treasury that would be authorized to tax citizens from across all countries in the union. None other than George Soros recently gave his opinion, that in order to prevent a financial meltdown, there is no alternative other than fiscal union in Europe. There are a number of reasons why, in my opinion, this will never happen.
The truth is, European citizens really don’t like or trust other citizens from outside their own nation all that much, at least certainly not enough to pool their finances with them. In fact, forget trying to unite people across different nations, some existing European nations can’t even stay intact. The former Czech Republic broke up in 1993 and Belgium has been leaderless since 2010 because the Flemish and Walloons can’t agree on a common government. Many Italians want Northern Italy to separate from the South of Italy, and a large percentage of the Basques and Catalans want to be done with the rest of Spain. It is no surprise to me, therefore, that a 2010 European Union survey reported that over 40% of EU citizens defined themselves as their own nationality only, while a mere 3% saw themselves as European only.
Europeans just don’t have a history of shared sacrifice. Even worse, memories of ancient and not so ancient hostilities are well engrained in the European psyche. Several European nations have been at war with each other on and off for centuries and it has only been seventy odd years since World War II ripped the continent apart. The Irish, Greeks and Finns fought hard for their independence and cherish it dearly. For example, after 700 years fighting to be free of British interference, can the Irish be seriously expected to turn around and hand fiscal sovereignty to a European government after having experienced only 90 years of independence?
While the whole raison d’être for the European Community was to link countries economically so that making war would not be to their advantage, it can be argued that the burden of maintaining a common currency is now pushing them further apart. Recently Greek rioters hung a picture of a Swastika outside the German consulate. German newspaper articles painting Greeks as corrupt and lazy are increasingly common.
Greek protesters burn the EU flag
The European Parliament in Brussels is now very unpopular, and emblematic of a democratic deficit. Voter turnout for parliamentary elections have been steadily falling over the years, falling as low as only 43% in 2009. A Spring 2010 European Union poll showed that 47% of respondents thought they would have weathered the recent financial crisis better had they retained the currency they had prior to the euro. Only 43% thought they would have been better off with the Euro. I can only imagine that if the poll were taken today, the numbers in favor of the euro would be even less.
The recent sovereign crisis has highlighted how ineffectual European leadership has been. Even with European interbank lending seizing up and U.S. money markets now closed to several major European banks, the leaders seem to not have been able to do no more than kick the can down the road again and again, buying themselves just a few weeks at a time. With Brussels already so unpopular, why would European citizens want to double down on their commitment to this ineffectual political structure?
It can of course be argued that the peripheral European countries face a disastrous few years ahead if they leave the euro. ATM machines would likely fail, bank deposits would be depreciated in value overnight by 30 to 50% perhaps. Nevertheless, if they stay with the euro, these countries would have no chance of being able to be competitive within Europe or globally and their debts would continue to compound. Default would still be the inevitable result. Whether Merkel and Sarkozy like it or not, French and German banks will eventually have to write off their sovereign debt losses. Many of these core European banks will end up bankrupt and several will be nationalized.
Of course, the average European citizen isn’t all that worried now about the fate of firms like SocGen, Fortis, DeutscheBank, and Commerzbank. The regular German on the street does know however, that he no longer wants to subsidize Greek public sector workers that work thirty odd hours a week and get to retire at 55. The average Greek knows she wants Olli Rehn off her back and her full pension restored. She wants an end to humiliating talk of selling off Greek islands to pay back foreign lenders.
Maybe I’m missing something, but I just can’t see how a European fiscal union is possible now or in the foreseeable future. I am amazed how many market pundits talk of a United States of Europe as a feasible solution to the current sovereign debt crisis. If Soros is correct, that leaves us with a European financial collapse as the only possible scenario.
Fair Weather Investors will be staying well away from European stocks for now. The Dow Jones Euro STOXX 50 ETF saw its 50 day moving average fall below its 200 day moving average back in July. Our research shows that historically, it has not made sense from a risk-adjusted perspective to hold broad stock indices once the 50 falls below the 200.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.