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Jul 11 2011 / Greek Debt Crisis - European Debacle

Default ALREADY!!


Death By A Thousand Cuts

Here we are back to the European Debt Crisis or Debacle as I see it, and markets are getting hammered again as those investors who jumped into the market just a few sessions ago and gave the markets one of the best rallies in decades now flee again back to treasuries or cash. The US Dollar is up, markets are down and once again the market shows that investors hate uncertainty.

In the article I wrote about the Greek Debt Crisis back in mid June I commented how my Greek investor friends kept saying "When" not "If" Greece defaults.

Investors, analysts, the media, just about everyone is harping on and on about why can't the EU and the European Central Bank get this dealt with. The answer is simple - because they actually can't fix it.

Greece, Portugal, Spain, Ireland, Italy are all independent sovereign nations brought together under one common currency. The problem is they are not one nation.

When they joined the European Union and commenced using the Euro, honestly, their valuations were WAY OVER VALUED. The living standard within Greece, Ireland, Spain, Portugal and Italy was no where near the living standard of Germany. Yet with an over valued currency, they moved to the "high-life".

It may seem too simple an answer, but actually it is that simple. These countries do not have the economies to be able to support the standard of living they have moved to. Anyone who has toured Europe over the past 25 years can attest to the sudden new found wealth that hit these nations. But it isn't real and not sustainable. These nations lay out billions in entitlements to citizens to retain a living standard that was never attained through growth of wealth within the nation itself.

All of these nations survived with currencies that made their products cheap and competitive. Today Tourism has become the biggest industry in all of these nations. Everything else cannot compete with the likes of Germany and to a lesser extent France. And the problems of all these countries is actually far more widespread than many investors realize. Holland, Belgium and a host of eastern European countries are all struggling with slow growth, Himalayans of Debt, unemployment and entitlement programs that will probably bankrupt a few of them.

With so many European Nations' economies in what has to be labeled "basket cases", investors need to be aware that this will eventually end badly. The European Union is a nice idea, but the social economic structure of the nations with everything from entitlement payouts, pensions, subsidies and much more is just no conducive to what is the model of a sovereign nation.

In the United States just as in Canada, there are strong regions and poorer regions. In Canada where I live, much of Eastern Canada does not have the economic power of Ontario or Alberta or British Columbia. In Canada there are "have" and "have-not" provinces. There are transfer payments that go from those regions of the country that have more economic "muscle" to those that are less strong. These are called equalization payments. Our nation has been doing this for more than a century and it works because we are a sovereign nation with a single currency controlled by a central government.

The same case can made for the United States, where again a central federal authority controls banking, currency and overseas the entire country.

Europe is not a sovereign nation. Perhaps in the future it may become one nation, but somehow I doubt it. So the question then for Europe is, do the wealthier, economically stronger nations want to support those with smaller economies. In Canada the same living standard is found from coast to coast. Even poorer regions are still supported by the nation as a whole in order to ensure that all Canadians are equal despite where they choose to live and work.

In Europe this is not the case. The introduction of the Euro was poorly planned at best. To take poorer regions of the continent, and falsely increase their living standard through an inflated currency valuation which has resulted in mountains of debt makes absolutely no sense. Many economists more than a decade ago predicted that the European Union could not function with basically "have" and "have-not" nations. These same economists predicted that in the end the Euro will fail unless the have nations want to always support the have-not nations. But again, when lifestyle, hours of work, job structures and much more vary widely among European nations, how can you treat everyone equally? Recent survey shows that many Germans feel they should not be supporting Greeks who work fewer hours, yet retire on good pensions while paying low to nil income taxes. Whether it is true or not really does not matter. It is the perception among citizens that matter.

So we are back to a slow agonizing death by a thousand cuts. Perhaps a better answer would be to realize that some nations need to remain outside the European Union, in which case my Greek investor friends are right when they say - Defaulting Makes Sense and sooner rather than later.




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