European Crisis Marathon Is Only Halfway

Includes: EU, FXE
by: Carlos X. Alexandre

The unexpected question in early January was whether Irish banks would need more capital, especially because Ireland has been a role model in the European debt crisis, and has stayed off the economic radar as of late. That same week, Irish Minister for Finance Michael Noonan said that "he does not expect the banks to need more capital, on top of the €63 billion ($81.5 billion U.S.) already committed by the State." Reality states that the Irish housing market hasn't recovered, and Irish foreclosures are still a huge problem. According to the Irish Central Bank, "more than a quarter of the 31.1 billion euros of loans on those properties was more than three months in arrears at the end of December." So much for a recovery, even after six years after the economic bottom started to fall off.

Taking into consideration the relative strength of the Irish economy, how will Spain, Italy and even France avoid the inevitable? One way is to avoid the answer and always deflect attention, and I shall quote Germany's finance minister Wolfgang Schaeuble

"Britain has a higher state debt than the eurozone average and I don't even want to mention the United States of America," Schaeuble said. "And I will add: I am quite concerned by the new policies of the newly elected government in Japan."

He's correct, but that does not void the debt issues that European members must face head on, and pointing the finger to others may be politically wise, but doesn't provide solutions. Having to resort to the "they do it too" maneuver in itself does not bode well for the future. It was noted by a Reuters' article that "France, Spain and Italy dragged the eurozone into a deeper downturn in February, according to business surveys that showed the chasm between these countries and prosperous Germany widening yet again," and since then the German manufacturing PMI for March took a turn for the worst, registering 48.9 and negative again, with the only positive number over the last 12 months delivered this past February. That in itself is a contributory fact behind the rise of Germany's new political party, "Alternative für Deutschland (AfD)," calling for an end to the euro, and providing the fuel for further political discord.

Certainly the sovereign debt markets have found what appears to be stable ground, with Spanish and Italian 10-year yields below 5%, but "banks in Italy and Spain were large net buyers of government debt again in January after spending most of the previous three months offloading it," according to the ECB. You scratch my back today and I'll scratch yours tomorrow is only a shell game and no way to solve a crisis. But a great summary of European bureaucratic premature boasting was well captured two months ago.

"I think we can say that the existential threat against the euro has essentially been overcome," the European Commission President José Manuel Barroso proclaimed in a speech in Lisbon earlier this month. The euro crisis is "behind us," argued French President Francois Hollande just before Christmas. "The most acute phase of the crisis appears to be definitely over," insisted Italian Prime Minister Mario Monti.

Then Cyprus popped out of nowhere, despite the fact that it had been brewing for a while, and the handling of the situation is hard to comprehend. Either they thought that the very small country could be bullied into submission, or they are truly running out of money. Time will tell, but all the money I had in Portugal came home this week in dollar form, and I know plenty of individuals doing the same through electronic transfers, not waiting for the bank to open the door. I was taught that it's better to be safe than sorry.

Considering that the former ECB chief Jean-Claude Trichet worked so hard to prevent capital flight, the demands and actions of the IMF and EU with regard to Cyprus are simply mind boggling. In addition, Vladimir Putin could have written the check himself, but the problem is that he still has a Cold War mentality and any geographic spot provides a good opportunity to rebuild the empire - and the Europeans know it. Another possibility is that Cyprus may get out of the euro and pledge allegiance to Moscow, and if the future looks brighter, then other members will start ruminating about exiting the common currency. Desperate times call for desperate measures.

Meanwhile, some voices are highlighting the obvious, and Italy's Finance Minister Vittorio Grilli comes to mind, although his broad idea cannot be implemented overnight. He stated that "European governments should reconsider their role and withdraw some entitlement services to allow the private sector to move in and create jobs."

During a panel discussion on creating economic dynamism, Grilli said governments in the past could boost confidence "by flooding the economy with public money. This is not possible anymore. At least in some part of the world there is no fiscal space to do that. So we need to be smarter and we have to recreate this space and redesign what is the public role in all of this," Grilli said.

I guess that Mr. Grilli isn't an avid Keynes follower, only because he has seen the money flowing in and flowing out, and then the end result. Last month, Wolfgang Franz delivered a very good analogy.

"We don't know yet how we're going to get out of the crisis," Wolfgang Franz, the chairman of Chancellor Angela Merkel's council of economic advisers, told Welt am Sonntag. "If the crisis is a marathon, we've got two-thirds of the course behind us. But the last third is always the hardest."

I wish that I could agree with Mr. Franz, although I concede that the last leg is always the hardest. But the way I measure it, if pure math is the tool of choice, we're about half way through this European crisis marathon. But don't laugh, fellow Americans, because the party around here isn't over either. I shall close with an interesting passage from an article published by The Telegraph.

Europe has plastered on some of the institutional structures of America's vast internal market - a single currency, common regulation and open borders between states - but it has learned nothing of its entrepreneurial spirit and rugged individualism. Instead, it sticks to an outdated and ever less affordable social model which is quite at odds with the economic dynamism it aspires to. Reform is now on everyone's lips, but it's not genuinely meant. Whatever the deficiencies exposed by the financial crisis, America has in the past 30 years managed to give birth to a whole host of astonishingly impressive, new global companies - from Microsoft, to Apple, Google and Amazon. It's hard to think of a single such European comparator. That says it all really.

I will admit that the American system needs more social accountability, better non-governmental equalizers, and is far from perfect, but the funny thing is that we now often refer to the European model as a guiding light in our own politics. How innovative! Although I am an independent without a political ax to grind, the fallacy is painfully obvious to anyone who takes a step back and looks at the European forest where the squirrels are fighting for fewer and fewer nuts.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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