If anyone used the term "eurozone" within the investment context only five years ago, most people would stare blankly and reply: "Euro what?" Now we're immersed in "euro stuff" and, more importantly, the "euro-girdle" is suffering form exposure fatigue far more than any celebrity, and as Hollywood will tell us, when there's fatigue, nothing good lies ahead. Investing is not what it used to be, only because everyone is on their toes awaiting the next rumor or statement that will throw the markets for a loop -- be it up or down. I tend to look at the macro picture, but every time I embark on yet another article addressing the issues of the day, a rainbow of officials come on the scene delivering conflicting accounts of what just transpired. Then I'm back to the drawing board, seeking an ultra macro approach.
European unity was, and is, of the utmost importance, and the common currency was the ill-devised vehicle that would deliver the EU from its conflicting past. But culture differences within a relatively small continent were never taken into consideration, and, to highlight the point, one must consider the emerging discord within euro members, never mind the union. Catalonia wants to secede from Spain, and the divergences are manifesting themselves outside of the EU:
The push here is being watched with nervous eyes across Europe, particularly in countries that have long struggled with powerful separatist movements, such as Spain and Belgium. At the same time, the prospect of an independent Scotland is sending shockwaves through Westminster, the seat of the British government in London.
As we move forward, I can only visualize the eurozone as the "Euranic," a ship taking on water, with passengers grabbing whatever lifeboats are left on deck. Yet the German captain and crew are not willing to let anyone jump overboard, because the passengers are leaving plenty of unpaid bills behind.
It wasn't long ago that China was the purported and ultimate buyer of European sovereign debt, but the last time I looked, the capital flow was nowhere to be found. But the idea has been floated again by Christine Lagarde, the IMF's chief, although this time the word "if" came before "when."
"If and when China helps others, it helps itself," she said in an interview with Caixin.
Meanwhile, the IMF, or perceived "Infinite Money Fountain" if one prefers -- which is as real as Juan Ponce de León's fountain of youth -- is now changing its time tested theory, and admits that austerity is not the solution:
The IMF's change of tune on the speed of budget cuts stems from research it released this week showing that aggressive fiscal consolidation crimps growth more sharply than previously thought. It also reflects a desire by Lagarde, a former French finance minister, to demonstrate the IMF is willing to get tough with Europe. Big emerging economies, who have helped top up the IMF's crisis-fighting coffers, had worried about the Fund's independence. "Let us not delude ourselves: without growth, the future of the global economy is in jeopardy," she said.
But in Europe's case, growth can only be achieved through more debt that they cannot afford, or exports -- and nobody is buying. I'll say it again, although nobody likes to hear it: Default is the only cure. In November of last year, I wrote the article "Forget The PIIGS: Now It's About The FIGS," and it appears now that not only are the PIIGS still in play, but the trouble with the FIGS is coming to a boil. But looking at Greece, the smallest problem, one must quickly realize that the party hasn't even begun, and the 2020 date raises plenty of eyebrows:
Euro zone officials are considering new ways to reduce Greece's huge debts because delays to reforms by Athens and continued recession have put the target of a debt to GDP ratio of 120 percent in 2020 out of reach, euro zone officials said.
Seriously? We're talking eight years to reach a better level of insolvency, with a basis on an unreachable best case scenario! The talk of more haircuts is making the rounds, although "buzz cuts" are more likely. But the talk and barb exchange continues, and the IMF pointed to what truly concerned the European Central Bank under Jean-Claude Trichet -- capital flight:
"Despite many important steps already taken by policymakers, this agenda remains critically incomplete, exposing the euro area to a downward spiral of capital flight, breakup fears and economic decline," the IMF said in its Global Financial Stability Report.
That is the best prognosis of the condition. Many moons ago, I indicated that the ECB's main goal under Jean-Claude Trichet was to prevent capital flight, not fight inflation. Yet the conversation centered on Europe's CPI as far as interest rates were concerned. Mr. Trichet left one year ago, and I'm not certain that he shared his playbook with Mario Draghi, and as the "Euranic" continues to sink, one could wake up one morning and realize that investor sentiment triggered a dumping of the euro. That is the real risk that must be considered, and everyone knows the end result.
Germany continues to resist any adjustment to Greece's bailout agreement, behaving like a bank that insists on maintaining a payment schedule, which can be remedied by repossessing the collateral in case of default:
Germany held firm on Friday in insisting it was too soon to say Greece deserved more time to meet its deficit-cutting goals even as the head of the International Monetary Fund laid out the case for leniency.
But there's no collateral in Greece or elsewhere. Only debt! Recently, I had to explain the euro crisis and possible solutions to a group of young people, and the best analogy that I could devise was to compare the euro to a tattoo. When someone has a change of heart and wants a tattoo removed, there will always be scar tissue.