Good morning. The more you dig into the situation in Europe the more complex, and yet, at the same time simple, the situation becomes. My favorite line of the day from Monday was a newsflash that the Finance Ministers of Europe were meeting Monday and Tuesday to "tie up the loose ends from the most recent EU Summit." Loose ends? Really? First of all, the only thing that came out of the 19th summit in the last two years was a MOU (memorandum of understanding) saying that the leaders were planning on doing some stuff at some point off in the distant future. And in watching the headlines from the various countries since the summit ended, it is clear that the various leaders aren't even sure what they agreed to at the latest gathering in Brussels.
Call me cynical if you must, but of the "grand plans" that have emerged from the various summits since the summer of 2010, this one appears to be the weakest. For example, how exactly does a single banking regulator (which may or may not be created by 2014) fix the fact that the banks in Europe are largely insolvent? How does the MOU solve the problem that the nations themselves spend more money than they take in each year, relying on the "kindness of strangers" to make ends meet? Yes, I know that a singular authority on the banks will indeed help ensure that a future crisis does not arise. But folks, the cows have left the barn and are still wandering aimlessly around that gorgeous European countryside as we speak.
Had the latest and greatest EU "grand plan" involved the creation of the much ballyhooed USofE, or at least a serious discussion thereof, then perhaps I could sign on to the bull case for Europe. If each of the 17 countries were willing to cast aside their sovereignty and join forces as one united fiscal entity that would share revenues and debts, then maybe, just maybe, the idea of a eurobond would make sense in terms of becoming a day-saving device for this crisis. But as things stand right now, it appears that the eurozone - assuming it stays together - is looking a lot like Japan did in 1990. And as Angela Merkel has proclaimed time and again, there is no easy fix to the problem.
Unlike a corporation, which can simply issue stock to the public and in turn pay down debt with the proceeds, a sovereign nation doesn't have any equity to sell. Thus, like a family of five living in the suburbs with a big mortgage, two cars, a boat, the vacation home, two dogs, a cat, and no less than six maxed out credit cards, the nations of the eurozone are going to need to figure out a way to either earn more or spend less (a lot less) if they want to get their fiscal house in order anytime soon. And to continue our little analogy of living the all-American suburban dream, it's like the countries of Greece, Ireland, Portugal, Spain, and Italy; all have just seen their respective wives lose their jobs.
There are of course two other options available to the countries of the eurozone, neither of which, though, is very palatable. First, the countries could abandon the Euro and simply hit CTRL+P until the debts are paid off. Or, as Greece has already done to a certain degree, the sovereigns could default on the current debts and start fresh. But given the ramifications involved with each of these options, it appears that this dysfunctional family is going to need to figure out some other way to cut spending and pay down the debt.
The good news is that just yesterday a solution appears to have presented itself via a la Republica article. It turns out that the under-secretary of the economy in Italy, Gianfranco Polillo, told the paper, "We are in a country where you work an average of nine months a year, and I think that now we must think that these nine months are too short."
It turns out that the concept of a work ethic is somewhat foreign to these southern European countries. (This reminds me of the old saw, "Socialism is great until you run out of other people's money to spend.") If you've ever traveled in France, Italy, or Spain, you are undoubtedly aware of the fact that shops are closed from 2:00 pm until 5:00 pm. And in France a tired and hungry tourist can't even think about having dinner before 7:00 pm because - wait for it - the restaurants are all closed (yes, even in a tourist town such as Chamonix).
It is also widely understood that there are three weeks in the summer where the whole place is on vacation. So, as I left France last summer, I told my wife that I could add 1% to then-President Sarkozy's GDP in a heartbeat just by making a few modest changes to the work week.
In short, this is what Italy's Mr. Polillo was referring to. The under-secretary opined that "if we gave up one week of vacation, we would have an immediate impact on GDP of around 1%." Now granted, the idea of increasing 1% with one extra week of work may have been an exaggeration. However, the concept is pretty straightforward. Like our suburban family of five, it looks like the PIIGS may have to get out there and work a little harder in order to keep the debt collectors from their doorsteps.
Turning to this morning ... While Asian markets were lower on Chinese data and ongoing growth worries, European bourses and U.S. futures have perked up nicely on word EU leaders will expedite loans to Spain in order to shore up the nation's ailing banks.
On the Economic front ... The NFIB Small Business Optimism index fell 3 points in June to an overall reading of 91.4, which was below the consensus for a reading of 92.0 and the lowest reading since October.
Thought for the day ... "True wisdom comes to each of us when we realize how little we understand about life, ourselves, & the world around us" -- Socrates
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- Dollar: higher against the yen, euro and pound
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