The Situation In Europe Just Keeps Getting Worse

Includes: ERO, EU, EWG, FXE, IEV
by: John M. Mason

The yield on the 10-year Spanish bond moved as high as 6.15 percent today. It had traded around 5.70 percent in recent days where it had fallen from over 7.00 a month.

Once again, it looked as if Europe was getting its act together and this seemed reason enough for the bond markets to resume buying Spanish debt.

Not to be.

Spain has enough trouble internally, with Catalonia among other regions within the Spanish nation, seeking independence. And, the solvency of the banking system in Spain has not been resolved. And, so on and so forth.

It seems as if everyone in Europe is playing "chicken". This "everyone" includes government leaders, government parliaments, government agencies, labor unions, regional governments, postal workers, farmers. You name it and each is challenging the other to "jump" first.

And, on top of all of this, the European continent seems to be sliding further and further into an economic recession.

It is hard to see when or where there will be an end to all this game-playing.

Some say that we need a real economic collapse…a real crisis. Then people will get together and create something.

Seems like we could do something better than this. If you think people are hurting now because of the way things are being handled, wait till you see the suffering that would take place if we have a "real" economic collapse.

As people have proposed, two major goals of European union need to be achieved. First, a banking union needs to take place in which "all" banks within the EU need to be a part.

There needs to be common rules and regulation, common supervision, and common central bank oversight. Countries are going to have to give up their sovereignty on this.

Secondly, there is going to have to be a common political union that includes control over European governmental finances. The EU cannot succeed with 17 different fiscal policies and one common monetary policy. This just cannot work.

There is one other issue that also seems to be crucial to the success of a European union. There must be a common commitment to making the industrial base of Europe competitive with the other major economic countries in the world.

It seems as if the only one talking about this is the German Chancellor Angela Merkel. Apparently, Merkel got a shock when she visited China in 2006. It was at this time that she realized that Germany was too small to compete on its own against China, as well as with America. She felt that the European Union had to get together, not only in terms of monetary and fiscal union, but also in terms of a common economic discipline so that it could play a role in the world.

Only in this way, she felt, could Europe achieve the scale and efficiency it needed to hold its own against these other two giants. In addition it would also make Europe more competitive in the emerging markets of the world.

In my mind, this, in itself, is a huge, time-consuming issue because making Europe competitive will be a massive job given what I saw and experienced in Italy this spring.

The problem is, I don't see many other European heads thinking strategically like this. Most people at the head of the governments in Europe can only see as far ahead as their next election…if they make it that far. If they are not in power or not in control then they cannot accomplish anything. But, in trying to overcome the protests and unrest as well as trying to get re-elected they are not accomplishing anything either.

And, all this dithering just adds to the economic uncertainty that exists in the world and the economic uncertainty just adds to the factors pushing down economic growth. Europe is seemingly caught in a cumulative cycle that only goes in a downward direction.

How to break the cycle?

Mr. Draghi, the president of the European Central Bank, is not going to be able to do it by providing more and more liquidity European financial markets.

And, Ms. Merkel faces enormous problems. First of all, no one wants Germany to dictate the future of the EU in healthy times. Secondly, if there is an economic collapse, no one wants Germany to dominate the EU because it is the strongest of the members because everyone else is flat on their back.

Where does this leave us?

Uncertainty rules the world these days. The pattern seems to be set. First, we get discouraged and we sell. Then, it seems as if people are pulling things together and optimism grows. How many "risk on"--"risk off" cycles have we gone through over the past three years?

If you like to trade on volatility then this should be a very good time for you.

If you play for the longer-term you have a bigger problem. In terms of a positive solution? How long is it going to be before European leaders actually pull something together? In terms of a collapse, how long will it take to experience a crisis that will bring everyone seriously to the negotiating table?

In instances like this I keep wanting to paraphrase Keynes: the market will not decide on going one way or the other for a longer time than your capital will hold out.

To contemplate investment in Europe is frustrating and discouraging.

I guess one just keeps selling Europe "short" until it gets its act together.

I guess one just keeps selling Europe "short" until it decides to get its act together.

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.