Thank you Peter, as always I find your analysis of the financial situtations informative and interesting. Now tell me what odds you would allow for the survival of the euro? Or indeed the odds of the EU surviving in the present form.
As our part of the world is quite stable [Excluding earthquakes!] and apart from an Aussie sporting win now and again. There is little that could separate us. Europe is different and I find events there are much more interesting. I'm curious to see if it will........disintegrate?
I am somewhat pessimistic about Europe, the EURO in particular. This is against my generally optimistic nature, but the facts are rather stark.
One of the likely effects of the turmoil, especially in southern Europe, will be a lurch to the more extreme ends of politics. We have seen this in France recently, where 20% of the electorate voted for a extreme right winger (Marine Le Pen, a name to conjure demons!). And a majority voted for a Socialist candidate.
The rallying cry of the extremists will be "Down with austerity!" Populist but, ultimately, self-defeating. There is no easy way out for most of Europe. They have run massive deficits and borrowed massively for years. Now the chickens are coming home to roost, with a vengeance.
As I have said before, the European governments have no control over monetary policy and bugger all over fiscal policy. They are locked into a downward spiral and, where other countries can improve their competitiveness by engineering a fall in the value of their currency (by printing it, for example), European governments cannot. Spain, with 25% unemployment, has to live with a currency that is par in value to Germany. The only diffirentiator can be in wage rates. There is a limit to how low wages can fall in Europe, for many reasons. At a time, however, when the Spanish government (as an example) needs to spend...well, it has no capacity to do so. Previous policies (spending like there was no tomorrow, for example) have come home to roost.
So, electorates will react against the endless rounds of austerity required to recover the budget situation. They will vote for anybody who tells them they can avoid the pain. It will be a lie, but it won't stop demagogues and the like perpetuating the lie. That is what the Socialists in France are promising today. They must
know it is a fraud on the electorate. Hell, even the electorate probably knows it is a fraud, but it won't stop people hoping
it is true.
So, we will see changes of government. If the new governments do what is likely, break those promises (the only way they can keep the EURO and the EU), then they won't last more than 1 or 2 terms. If they actually implement the policies they are espousing, it will result in an earlier breakup of the zone than might otherwise be the case.
Either way, i find it hard to believe that the European experiment (altruistic and noble as it is was), in its current form, can or will survive. Chaos is the big risk, with the consequences (probably) far worse than what is currently the case. The EURO is certainly, in my view, on borrowed time.
I would just point out that Fascism arose in Europe in not dissimilar circumstances some 90 years ago.
There is one job I would not wish on my worst enemy right now, head of the European Central Bank.
And before everybody starts pointing out that the US is in just as bad a shape! It isn't. It is running an unsustainable deficit, for sure. However, the economy is recovering and unemployment is falling (albeit much more slowly than most would wish). Unlike Europe, the US Federal Reserve still has levers to pull. Not in monetary terms (interest rates are already effectively at zero) but in terms of quantitative easing. The Fed could (but I don't think will) simply 'print' more money, if it felt the need. The ECB is precluded from doing that by it's constitution.
Being the world's largest economy, having the world's reserve currency and being more heavily engaged (economically) with Asia than with Europe has it's benefits.