Paul Krugman applied this perfect label to the current situation in Europe about the economy, society, and the Euro currency. He points out some of the tired but scary observations about how countries accounting for about 1/3 of the European economy are teetering on edge of ruin and default. The richer countries like France and Germany have been providing support while insisting on austerity and reforms. But, the bills seem to get bigger and the “rich economies” of France and Germany are low or no growth. That’s the big problem that is leading some to predict the Euro will cease to exist. The best rebuttal to the this argument is the UBS Euro Note Sept 2011 predicts that the Euro will be supported with a slow and very painful integration of fiscal policy over time. It’s worth reading the whole note, but the situation might best be described as “damned if they do, damned if they don’t.” This is due mostly to the fact that the costs for exiting the Euro by choice or force are massive.
Back in 2004 I was attending a small group event in Paris focused on the global economy and the Euro. Trichet came to speak with us “off the record” and made it clear that the reforms required for the Euro to succeed were far beyond what the people of Europe would ever accept. The strategy up to that point was to emphasize the benefits of a more unified Europe and a single currency while avoiding all discussion about other consequences. For example, one might talk about how much easier it would be for people in one country to send their kids to school in another or even move there to take a new job – the promise of more mobility. But, the fact that funding for schools might be severely reduced isn’t mentioned.
For the next few weeks, the world will be wondering what sort of “grand plan” the “authorities” in Europe will craft to unveil at the G20 meeting on November 4th. The current European Financial Stability Facility (EFSF) has a $600B checkbook which is probably enough for Greece. However, if Spain and Italy are at risk, the estimate for what will be needed jumps to about $3T. It’s only one letter so we should all pause and read that figure as “three trillion dollars” which is a lot of money. The final proposal is likely to be complicated, but the thrust of it is to leverage resources by apportioning the losses from defaults and use the assets of the rich countries to absorb only a portion, say 20 or 30% of each loss. I’m not smart enough to understand why this would actually work but perhaps global markets will see the value of this approach.
That part describes the “terrified” aspect of the Eurozone crisis. The numbers are big, and nobody can be sure if it will work. The “bored” aspect has to do with the structural lack of growth in the rich countries. Without significant growth, the countries in Europe are forced to play a grim zero-sum game. The rich give to the poor and then are forced to cut benefits and reduce their own quality of living. No wonder tensions are mounting. Growth fixes the problem because living standards can rise for the rich countries and give them more resources to share with their poorer cousins.
So how could Europe solve their problem if growth is the only way to do it and they are saddled with tons of debt? There’s only one way but it doesn’t seem likely. It’s an often-dreaded four-letter word called WORK. But, this isn’t just work in the conventional sense of “there I came in and did something” but the kind of HARD WORK that generates a stepwise improvement in results. Even worse the measure of this situation suggests we are really talking about LONG HARD WORK. People familiar with Europe tend to respond with “Wow! That’s NEVER going to happen!”
It could happen though. One simple solution would be to reinstitute the draft. This would immediately solve two big problems in France. #1 the massive unemployment of young adults would go down, and they would receive training and experience to obtain jobs after their service period and #2 different elements of society would again be integrated under a common cause and belief system. France has also gone some distance in making it far easier to become a freelancer or start a small business. But putting these and more things with bold measures and leadership is out of reach based on most educated guesses.
Back in June of this year I attended the “eG8 Summit” in Paris and came away with a sense that the governments of Europe, particularly France, would have a hard time not overplaying their hand of government intervention. (See the full document in PDF here: eG8 Meeting Summary June 10 2011.) France wants to orchestrate successful growth instead of create a sustainable system that can drive itself. Almost every aspect of growth depends on some government program, handout, or tax break. There are a few brave souls who have built important businesses in France from scratch, some even on the Internet, but they are rare enough to be on display at the eG8 meeting as if they were exotic animals.
The most recent events have not given much reason to hope for better leadership. In August Sarkozy and Merkel put their heads together and came up with little to nothing of substance. After visibly agreeing on how nice the weather was the two discussed meeting more often and raising taxes on financial transactions. It all elicited a groan from anyone with a passing knowledge of growth, wealth creating, economics and capital markets.
So what does it all mean? Only one thing in the medium term that is to avoid European assets and regional investments in favor of global and multinational equities. Many are sporting high earnings yields, rich dividend payments, and excellent coverage ratios. Own the best quality free cash flow relative to equity. They may all remain under pressure for a while as global growth slows, but they are the only attractive long-term investment play right now except technology and startups.
- Paul Krugman: Euro Zone Death Trip (economistsview.typepad.com)
- Merkel, Sarkozy take on debt crisis amid slowdown (theglobeandmail.com)
- Europe Aiming To Ramp Up Crisis Fund As Other Nations Raise Alarm (huffingtonpost.com)
- Obama Administration Jawbones France, Germany on Eurozone Crisis (news.firedoglake.com)