Maybe the Group Is Wrong?
Look, the EU faces a very simple set of questions and some “owning up to” a set of rather bad decisions. We, too, in the US are in a similar position and we should be watching Europe with a fair amount of interest. I believe the higher cost of financing is heading our way and probably sooner rather than later. The ability to print money, in the end, will not be able to save anyone.
So, here’s my take.
There are a number of items of note from last week’s EU Summit. While naysayers spent their weekend spilling ink to tell us all how hopeless the situation is and how the EMU and the Euro will go the way of the Simca we think it’s a bit more complex than “the sky is falling.”
Indeed, last week’s moves were significant on a number of fronts. The ultimate outcome rests on being able to operationalize a good deal of what has been put on the table over the last six months. We believe that a workable outcome is in the cards. The option to fail is far more costly than that of a union that is disciplined in the future.
Our analysis of the current situation and a peek into what the backside looks like is below…
Time
A number of pundits spent space telling us that “time” is of the essence. However, in this case time is relative to confidence not to action. Yes, words need to be followed through with action and yes, it takes a ton of time to get things through the current treaty structure – we get that. However the issue is one of longer-term confidence and that can only come when Europe is collectively committed to a series of more responsible fiscal policies. It is worth noting that Germans got it right from the beginning. There has been very little “finger pointing” or accusations just a steady stream of potential fixes and ideas that lead down the path to tighter fiscal integration.
Integration takes time.
Culture Wars (Euro Style)
Two – It’s the 21st century get over your “culture” arguments. The world is a big massive competitive capital market – even the communists are capitalists now. With this one has to significantly question the long embedded ideas of sovereignty and national identity and that they would actually be “giving something up” to Brussels.
Yes, we can have a sense of who we are as a people and what we like to value but you have to budget responsibly within those proprietary priorities. No Maude – you can’t have it all.
More importantly the kind of shenanigans that the UK pulls at every summit should get them permanently removed. If they want to be the banking center of Europe and have lower regulation and higher pay and watch the City blow up the UK and other parts of the world – GREAT! Guess what? Capital tends to figure out risk pretty quickly and when it doesn’t it gets wiped out. Those are the rules and they have very little to do with Bulldog British-isms or French Farmers or Greeks who like to retire at 55.
History – Everyone has a past – get over it!
Third – Hey guys!! World War I & II were over 60 years ago…. could we move on? Banks not Tanks? Really? How about responsibility instead of decade’s of rather fallacious behavior?
The whole idea of the EU and the EMU is scale… If you didn’t get that back in 1998 you shouldn’t have signed up. When you run the numbers the EU is a bigger economy with a higher GDP output and a lower level of debt than the US. (You have to include the US debt at the State level for this calculation to work) And so, the argument goes, levering up that collective set of numbers should be good for every one.
As we now know it only works if everyone plays with the same rulebook.
Everyone is Guilty – Vendor Financing
Fourth – Germans have to own up to their part in this too. They knew damn well that by collecting the whole of the EU’s balance sheet and lending against it they could engage in what is typically known as vendor financing. Everyone gets a lower rate and they buy Germany’s awesome cars and coffee makers. It’s great until credit gets tight… MAN THAT SOUNDS FAMILIAR…
Now, to be sure, I don’t think we need to think of Germany as Countrywide and certainly Merkel’s no Mazillo (ewwww) but there is a bit of truth to this “devilish” pact that was implicit during the good times in the mid 2000s.
Discipline
Fifth-It remains clear that prior to loading the Bazooka, saving the banks and promising to backstop “Paulson Style” the Germans want to ensure that they are not throwing good money after bad. In fact, the German taxpayers are rightly demanding so. US based skeptics seem to have their anger misplaced when it comes to critiquing Germans for holding the line here for a bit more bite when it comes to lending cash to institutions that have caused the mess.
Growth
The final reason markets continue to react poorly to that laundry list of summits and proposals is that there is very little in terms of growth ideas that have been a part of the broader agenda. Fiscal discipline alone does not save an economy that is in the midst of a paradox of thrift – just ask David Cameron. Oh actually don’t ask David – he went home last week with his “bulldog spirit” in tact for the next election.
In the coming weeks we will need to see the following in order to stabilize market sentiment and begin the process of rebuilding investor confidence in Europe
1) Clarity around how the new treaty is operationalized
2) IMF involvement in the support of structured loans to Spain and Italy
3) The large scale sale of housing debt in Spain and Italy to the ECB (see Timmy G’s playbook)
4) In addition, a pledge by ECB to purchase all sovereign issues for the next five years. Ahead of this pledge a collective issuance table would be completed allowing for a much smaller amount of issuance over that time period. (It’s funny what you can do when you live on less for a while)
5) A Euro-wide investment and infrastructure plan (See Alpert, Hockett, Roubini The Way Forward)
6) It would help if the ratings agencies held off for another three months – we all know European debts are a bit more risky at the moment thank you very much!
The grand European experiment is not dead. It’s a clinical trial that came back from the FDA after 10 years of testing with some serious flaws. Ask any good lab – they tend not to throw out the entire project…. They build something better and new.
Europe is in the process of so doing.
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