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.
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.
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.