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Europe The Final Count Down

May 18, 2013

europe final countdown

If you have come across this page seeking info on the Swedish rock band and its 1986 hit, I must disappoint you. While Joey Tempest and band might be a more interesting subject than finance, this post is limited to the tempest that is about to intensify in Europe. Sorry.

The cracks within the EU

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When the Euro was created in thought in 1992 in Maastricht, Holland, the European Union was looking forward to crown its union with a common currency. Having come of age at that point I was also enthusiastic about this prospect. The treaties signed by all participating countries stated rules in order to ensure the stability/credibility of the future currency. Governments were not allowed to borrow beyond 60% of GDP and above 3% of GDP per year. By 2007, only Luxembourg and Finland had played by the rules. http://en.wikipedia.org/wiki/Maastricht_Treaty Needless to say, the faith in the currency union has been shattered and no consequences for rule violations were enforced. Furthermore, European banks are now in trouble because they bear the burden of governments borrowing out of control(holding their bonds as reserves). While I am critical of many financial institutions, blaming European banks for the obvious violations of the Masstricht treaties by public servants is unjust. Assuming that the perpetrators(national governments) of the banking crisis in Europe are now supposed to solve the banking crisis they created  is naive at best. What has become clear is that the under capitalization of European banks needs to be addressed yet how to do so is the contentious debate behind closed doors of the European powers that be.

Solutions

Van Rompuy

Herman Van Rompuy (here with the Irish Finance Minister Michael Noonan) knows where the money for the European banking bailout is, in Germany. (Foto: consilium) (Photo: Consilium)

German led surplus countries would prefer to confiscate savings over 100,000 Euros of bank customers in order to replenish bank capital levels across Europe. While no sane politician would come out and admit so publicly, the wheels are in motion: http://translate.google.com/translate?sl=de&tl=en&js=n&prev=_t&hl=en&ie=UTF-8&eotf=1&u=http%3A%2F%2Fdeutsche-wirtschafts-nachrichten.de%2F2013%2F05%2F16%2Feu-setzt-masterplan-um-enteignung-der-sparer-kommt%2F As for government debt levels, German conservatives would prefer austerity over deficit spending. France and the deficit countries’ governments believe that this would lead to a prolonged depression within Europe and has suggested that the ECB should print money as in Japan and America. Furthermore, European governments should stop austerity immediately and increase deficit spending. http://globaleconomicanalysis.blogspot.ca/2013/05/hollande-asks-ecb-to-engage-in-japanese.html  After all, America is supposedly back on track and Abenomics is deemed to be a success according to Bloomberg news http://www.bloomberg.com/news/2013-05-16/japan-becomes-most-favored-nation-in-poll-showing-abe-optimism.html

Leaders in Europe finally agree on one thing. Europe is in recession. http://money.cnn.com/2013/05/15/news/economy/europe-recession/index.html  Congratulations on this revelation.

As readers of this blog know I have no faith in money printing resolving any economic problems in the long run but apparently, world markets assume that this course of action is the best option right now. Regardless of what I think, it is clear that Europe is not unified in its approach regarding its common currency. The clock is ticking. The capital- and resulting social issues in Europe are intensifying and unless consensus is reached the days of the Euro are numbered. The construct of a single currency run by seventeen independent financial governments with different philosophies behind it has always been a rather naive concept. In my opinion, European leaders need to decide whether to form a financial union or not.

On the one hand, I understand the disciplined approach by the German government as it is trying to reign in excessive spending and return the continent to a sustainable economic model. However, many deficit countries are in such desperate economic conditions that a serious depression has started under German austerity plans. Already, we see Southern Europeans flocking north in order to find employment or at least, German social services guaranteed by the EU to all EU citizens. http://translate.google.com/translate?sl=de&tl=en&js=n&prev=_t&hl=en&ie=UTF-8&eotf=1&u=http%3A%2F%2Fdeutsche-wirtschafts-nachrichten.de%2F2013%2F05%2F10%2Feu-alle-europaeer-haben-anspruch-auf-sozial-leistungen-in-deutschland%2F Obviously, there are social repercussion with this felt all over Europe.

Spaniards moving to Germany

The number of Spaniards who came to Germany in 2012, has over 2011 increased by 45 percent (Photo: Flickr / abdallahh).

“A triumph of hope over experience”

In England, the UK Independence party has recently won a stunning 26% of popular vote. In their opinion, the UK should leave the EU altogether as it appears to be in disarray. Listen to MEP Bloom’s two minute speech in front of the European parliament in Brussels.

The Final Count Down

With German elections in September, the fate of Europe will be very much dependent on their outcome. If Mrs. Merkel wins relection Europe will likely continue to push for austerity and structural reform. http://translate.google.com/translate?sl=de&tl=en&js=n&prev=_t&hl=en&ie=UTF-8&eotf=1&u=http%3A%2F%2Fwww.n-tv.de%2Fwirtschaft%2FDeutschland-spaltet-seine-Banken-article10663041.htmlhttp%3A%2F%2Fwww.n-tv.de%2Fwirtschaft%2FDeutschland-spaltet-seine-Banken-article10663041.html If the Social Democrats take over power in Germany, expect a European version of Abenomics and massive QE. After all, according to Mr. Bernanke and Mr. Kuroda the printing press solves economic problems. Interesting times ahead… What does Joey Tempest think?

Joey Tempest

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3 Comments
  1. Matt Preschern permalink

    Hey Rich – what a detour compared to a much more positive (European) outlook you had only 5 months ago…

    • Not really. I stated then as well that the Europeans need to resolve the currency issue or else. They haven’t but if they do I’m still optimistic…

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