How Bad Off Is Europe?

Both London’s FTSE 500 and Germany’s DAX stock exchanges were down 2% yesterday over fears of a potential exit of Greece from the EU.

Stock markets go up and down over rumors like yo-yos and both exchanges will come back up again. That is not at issue. There is a lot more to it.

In the short term, stocks hinge on the first meeting between new French President François Hollande and German Chancellor Angela Merkel later today. The two are on opposites sides of the austerity chasm.

Many U.S. economists hail Europe’s new anti-austerity movement, led by Hollande, as a positive new turning point for Europe’s economy. In a normal recession they would be right. But this is anything but normal.

Yesterday, a deeply sobering assessment of the EU financial crisis appeared as a front page story in the world’s leading daily financial publication:
Faith fades in eurozone firewall
– Robin Wigglesworth and Miles Johnson, Financial Times, 5/14/2012

Europe’s Troubles in a Nutshell

According to the Financial Times, here are a few NEW wrinkles in Europe’s growing financial crisis:

  • Europe’s €500 billion euro bailout fund is not big enough
  • The EU firewall can only save Spain, not anyone else
  • Moody’s on Monday downgraded 26 Italian financial institution’s credit ratings
  • Greek election political turmoil puts its debt crisis at even greater risk
  • Greece defaulting it’s sovereign debt and exiting the EU is considered very plausible
  • Hollande’s election signals open EU warfare over austerity
  • Spanish and Italian 10-year bonds yields are highest of the year
  • Germany’s 10-year bond yields are at historic lows

The Financial Times reported no good news.

Here is the latest now being said about Europe’s financial crisis:

There is a risk of contagion. If Greece left the euro, which is a hypothesis that today we cannot avoid, we have to look at the chain of consequences (for banks)
– Jean-Pierre Jouyet, French Financial Adviser to François Hollande, 5/14/2012

It is that uncertainty, not austerity, that is doing the real damage to the European recovery, and indeed the British recovery
– George Osborne, UK Chancellor, 5/14/2014

It’s looking alarming right now. The market is effectively trying to price in a disorderly exit for Greece. We need more drastic policy intervention to calm nerves. Whatever policy framework they have in place now is not enough to ringfence Spain and Italy.
– Luke Spajic, PIMCO, 5/14/2012

German and American 10-year Bond Yields

Bond yields at historic lows should signal economic strength. Indeed, just this morning Germany announced positive GDP growth figures that are cause for optimism.

However, German bond yields were at historic lows BEFORE that announcement.

The problem…
German low-yield 10-year bonds doesn’t reflect German economic strength as much as it signals economic weakness throughout the rest of Europe. Germany is a safe haven from the economic basket case surrounding it. It has the strongest economy.

That should sound very, VERY familiar to Americans paying attention. As of yesterday, U.S. Treasury bond yields were at an astoundingly low 1.78%!

That is the 2nd lowest yield since January 2, 1990… the furthest back that U.S. Treasury keeps online records. There was an anomalous dip to 1.72% on September 22nd of last year.

Everyone intuitively knows the U.S. economy is terrible. Its not as bad as Europe’s, but bad.

On the world stage U.S. Treasury securities are a safe haven from the rest of the world’s economic black plague. The U.S. dollar is the preferred currency of world trade so investor’s are flocking to it in droves. Like Germany, that is why yields are low.

Conclusions

The economic fate of Europe hinges on the austerity battle over how best to solve its economic crisis. That is still very much up in the air.

In the silliness of an election year, Americans are preoccupied with gay marriage. We are ignoring the big picture. It’s the economy, stupid!

Americans are either ignoring or marginalizing the true state of the global economy at further peril to our own precarious one.

The U.S. has about 8 million fewer Americans working right now than needed to bring us back to full production and a healthy economy again. As a nation we are $15.7 trillion in debt and bleeding red ink to the tune of over $3.5 billion/day. We are not in good shape.

Like it or not, we live in a globalized economy. Americans don’t control things anymore. What happens in Europe and Asia has more impact on our economic future than the empty promises made by candidates for U.S. president in an election year.

Until we wake up and smell the stink weed, we will remain in peril.

All the happily married gay couples we will ever have in the U.S. cannot change that.

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About azleader

Learning to see life more clearly... one image at a time!

Posted on May 15, 2012, in 2012 Elections, austerity, culture, economics, EU, Greece, Life, news, Opinion, Politics. Bookmark the permalink. 8 Comments.

  1. Maybe someone should show them the Laffer Curve. They need to try cutting spending and taxes.

  2. I can’t help but wonder if Europe’s woes could have been better addressed if the states ceded more power to the EU. I feel like Europe had a good idea in trying to create a more integrated economy, but they only did it half assed. There was little political unity and even the economic/currency union was not complete. Individual states had to give up control over the currency but had to keep their debt. This limited the states ability to manage their own debt. If Europe had nationalized its debt when the Euro was created I think that Europe would be in a much better position. Perhaps Europe’s problems are not entirely economic, politics may be a large factor. Their politics are out of balance: too much states rights and not enough federal power. Here in the US we may have the opposite imbalance.

  3. Correct… the EU forming a currency union without forming a fiscal union was a mistake. That left some states, particularly Greece, unable to use their main weapon to fight debt, currency devaluation.

    At the end of the day, that is not the cause of the European debt crisis, nor is it entirely politics. It boils down to a lack of good old fashioned demand. That is caused by excessive debt growth at all levels, government to household. England is in full recession and it isn’t even in the currency union.

    Until economics readjusts to current reality its gonna be a rough ride globally… not just in Europe.

    • What is your opinion about the future of the Euro and the EU? Will they survive the storm or will the whole thing fall apart?

      • Nobody has that crystal ball. The scuttlebutt in the Financial Times is that it depends on the outcome of the Greek elections next month.

        If, as a result of the elections, Greece rejects or reneges on “the memorandum” then there will likely be a disorderly exit of Greece from the euro and that could have a cascading effect that will spell the end of the euro and the EU as we know it.

        Greece is in terrible shape. Its so bad that money is being drained from its banks and taken out of the country at a prodigious rate. 5B+ in euros just since May 5th. That matches the monthly drain each month for many months now. There is a fear of an out-and-out run on Greek banks.

        Within the last few days the ECB stopped providing Greek banks with normal “liquidity” services fearing its own losses.

        Three more eastern European EU countries reported GDPs in recession two days ago.

        Things don’t look promising for the euro or the entire European economy.

        We, of course, read little about that in our press… but it is headliner news in the Financial Times.

      • I made the answer to your two questions into a new article.

        Both questions you asked encapsulates deep seated concerns all over the world about the EU.

        I hope you don’t mind me stealing them for my own nefarious purposes. lol!!!

    • I don’t mind at all. Im looking forward to reading you latest post later tonight.

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