To clarify, the term "euroland" was coined last year by European President Herman Van Rompuy.
The speech he gave was called a "Plea For the Euroland". He doesn't want people to refer to it as the eurozone because it "sounds distant like some industrial zone, somewhere outside the city's center." "Euroland" is what he wants people to refer it to, maybe because it sounds like Disney and will make investors happier with the state of Europe.
As another G8 meeting concluded, always designed to convince the populace that someone is in charge, the message was very clear in the minds of the leaders.
The Group of Eight economies stressed on Saturday that their "imperative is to promote growth and jobs," as they also recognized problems among European banks and gave verbal backing for Greece to stay in the euro.
Yes, growth and jobs do sound wonderful and provide a welcome sound byte for the news cycle, although recognizing unserviceable debt must be the first step. In addition, no one wants Greece to leave the euro despite all the empty threats that are broadcast on a daily basis. But it was May 3rd, just before the French and Greek elections, when Fitch Ratings provided a broad opinion about the current European state of affairs.
The crisis has shown that EMU is substantially flawed and fundamental reforms are needed to adapt it into a long-term viable structure. Some of these elements are being put into place, such as the fiscal compact, country fiscal austerity and structural reform programs, and substantial financial assistance to peripheral countries from the European Financial Stability Fund (EFSF) and the ECB.
Fitch believes additional measures will be needed to resolve the crisis. These are likely to include some dilution of national fiscal sovereignty, potentially some partial mutualization of sovereign liabilities and resources, as well as measures to enhance pan-eurozone financial supervision and intervention, combined with further institutional reforms to strengthen eurozone economic governance.
It's hardly a revelation that the euroland is "substantially flawed" when a number of outspoken individuals have been pointing the finger for over a decade. However only when a "well respected" organization repeats the same mantra, and unveils how part of the end game will unfold, do the markets listen. Apart from surrendering sovereignty, an idea that will be fought by every European in the continent, the core of the opinion is the most damaging, leaving no euroland country untouched. "Greece would very likely have to re-denominate its debt and default again." But this time the color of money will be different, and every creditor will be stuck with drachmas, not euros or dollars supplied by the Troika.
Of the alternative scenarios presented, Fitch believes that a Greek exit is the most likely. In that event, all eurozone sovereign ratings would be placed on Rating Watch Negative (RWN), with those already on a Negative Outlook at most risk of a downgrade.
And then the stock market rout began. We can play this "all is under control" game until the cows come home, but the misrepresentation of facts and state of denial will eventually be exposed when the money is literally not in the bank. Until then the stock market musical chairs are the only game in town, and becoming immersed in fundamental analysis when bank and sovereign balance sheets are becoming as relevant as sheets of wall paper, is the fallacy of the day.
I close with an excerpt from a speech delivered by Jean-Claude Trichet, former president of the ECB, at the European Business School London, on 29 November 2006, just before Bear Stearns gave us the first hint that hell would break loose during 2007.
Cast your mind back to the end of 1996, two years before the euro was launched. You might remember what the common wisdom was on this side of the channel at the time … What would one have thought if somebody had said: look, in ten years' time the president of the ECB will come and tell you that on the 1 January 2007, a 13th country will enter the euro area; that the euro area will have a total population of 315 million people; that the euro is a credible currency which has kept inflation in line with its definition of price stability; and that the anchoring of inflation expectations fully reflects this credibility. Also telling you that the promise made to the investors and savers as well as to the people of Europe had been kept, that the new currency is as credible, as confidence-inspiring, as solid as a store of value as were the previous most credible national currencies. What would have been the reaction of the audience ? Well, considering how cautious a number of analyses were at that time, one would most probably have thought that it was a fairy tale.
A fairy tale it was, and the argument about the euro's "credibility" is only true because it exists. But I cannot hold three pieces of lumber, two shingles, a door and a window, and proclaim that I now have a house. The point is not so much about the prematureness of the celebration, but rather the fact that European bureaucrats want to believe, and will continue to do, that the system isn't broken despite the evidence.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
