Saturday, October 29, 2011

So...the European Union is now financially sound, right?

Well, how wonderful. The European Union high brass apparently, they say, solved the restructuring of the Greek debt situation this past week. So everything is just hunky-dory, right? I mean, the stock market went up almost 3% on Thursday and everyone was singing the praises of a done deal. That has to be good news, right? Well...sort of, but there are a couple of unfortunate realities that no one seems to be considering. I wonder how the world markets and economies will react when those realities suddenly dawn after the hangover of the one averted crisis passes. "What are you talking about?" you ask.

May I suggest that the whole idea of referring to a "Greek" problem is both inaccurate and misdirecting. Remember the original discussion of the challenges to the EU...remember the reference to the "PIGS" countries; Portugal, Italy, Greece, and Spain. No matter how you cut it, Greece is only one of four bad situations presumably "solved," and I would point out that with the ongoing rioting in Greece, even that matter is still open as many in Europe still see Greece defaulting on its obligations...this latest maneuver has only put it off, sort of the equivalent of Congresses actions in America in "kicking the can down the road." But...back to the larger problem. The ECB (European Common Bank) has now set, with political approval, a precedent on allowing a member country to cancel part of its contractual financial debt. That means, of course, that all other members of the EU are eligible for the same treatment, does it not? Do you really think that political winds will be able to say "no" in the face of a beginning "yes" to removing at least a portion of the consequences for poor administration and planning?

So, may I suggest you take a closer, more jaundiced view of the situation in Portugal. How many of you are aware that the Public and Private debt in Portugal will reach 360% of that nation'g GDP (Gross Domestic Production) next year? Anyone? I know that until recently I sure did not know. Remember, we in America are nowhere close to that and we are at least aware (or giving lip service) to the problem. The cost cutting necessary in Portugal to try to deal, at least partially, with this problem is throwing them into a national recession that, in turn, will harm business outlook in the entire EU. And they are not out of the woods by any means.

The financial fiaco in the PIGS countries have resulted in their inter-european trade situation relative to Germany (a country which has governed it's finances splendidly) decrease by 30%, and there is a limit beyond which Germany will not (and cannot, politically) go to bail out other countries. After all, why should they put their citizens at financial risk for the profligacy of citizens in other countries? A boost in the EFSF(the European bailout fund) from 440 billion euros to 1 trillion euros ... or supposed to create an economic firewall, but the success of that is questionable. And there is a secondary concern for those of us in the United States, since if Europe goes into a broad recession, the United States will also suffer the consequences. The rise of free trade agreements has made all companies global and if Europe gets a financial cold, we will start sneezing too...and we are already feeling poorly, financially.

One solution to the European crisis would be to print more money. The trouble with that "solution" is that rampant inflation would result. Of course, that kind of printing of money is unlikely to happen because Germany would never allow it as the result would be to weaken it's financial position, which they have been very vigilant in protecting and fostering. There is a limit to how far they will go in supporting the less than intelligent or financially viable foibles of their EU brethren.

We in America have no such compunctions, of course. We continue, under the auspices and quiet encouragement of the current administration, to watch our Fed and associated agencies blithely print money (which the EU cannot do without specific authorization from the member nations) without a declared plan or explanation...and more especially, accountability of those making the decisions.

So, lest any of you be surprised, the economic challenges in Europe are far from over. They are just beginning. The government safety nets are only delays that prolong the harm and period of recovery, put into place as a political act by those in power to project an image that they are "doing" something. The desired inference is that those acts are helpful; they are not. They amount to peeling off a bandage a millimeter at a time instead of just yanking it off; years and perhaps decades of financial woe, instead of 2 to three years of recession or even depression. The laws of physics and the laws of finance are similarly immutable; excesses and violations of those laws must correct...all governments can do is to drag them out, or allow them to equalize. We, the people, err in allowing governments to sell us the proposition that they can change those laws. They can't. We prove our stupidity by allowing them to even finish a promise that is contrary.

Remember, the United States contributes to the European Bank. We contribute to the bailouts...and we share in the losses they incur. We are already borrowing money to finance the defense of a large portion of the free world. Why? I have no idea...except perhaps for vanity, the Devil's favorite sin. Tighten those seat belts, my friends, the rough ride is just beginning...

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