Jul 11 2011 /
Greek Debt Crisis - European Debacle
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
Debt Crisis back in mid June I
commented how my Greek investor friends
kept saying "When" not "If" Greece
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
Greece, Portugal, Spain, Ireland, Italy are all
independent sovereign nations brought together under
one common currency. The problem is they are not one
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.