Sent: 22-05-2012 11:34:03
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Europe Is Making Progress
A solution to the Greek debt crisis may actually require the current period of apparent chaos as a precursor to an effective policy response.
None of the prospective scenarios about how Europe deals with its current debt crisis point to any straightforward, speedy or neat solutions. All the potential outcomes are messy and capable of plunging a highly contrived political and economic entity into a historical abyss.
That said, the part of the world between the Atlantic Ocean and the Ural Mountains will still exist in some form or another. The question for investors is the form that entity will eventually take and what effect its evolution will have on the rest of the world.
Finding a new government for Greece appears to be the most pressing problem. The Greek problem, however, is now very similar to the difficulties facing governments throughout Europe: namely, widespread and open hostility toward the so-called austerity measures designed to bring about fiscal restructuring.
In Britain, France, Germany and Greece, within a few weeks, incumbent political parties have been rebuffed by an uneasy electorate. Widespread hostility directed at financial institutions is also apparent.
The caricature of the Greek tax avoider retiring early to enjoy his publicly funded pension is a convenient target for those seeking change. In reaction, the targets of this caricature are pointing increasingly to banks lending profitably across borders, never questioning the credentials of the borrowers.
On this latter view, blame should be shared equally, at worst, between lenders and borrowers with both taking the consequences of their actions - or both benefiting equally from any public support.
The message from the ballot boxes in Europe is that the burden of adjustment is being shouldered too much by ordinary people and not enough by the financial institutions which also contributed to the debt accumulation.
This is similar to the sentiment now evident in the USA where many politicians standing for re-election are openly courting a vote that is hostile toward "Wall Street".
With the opportunity to vent their feelings in parliamentary elections, a broader population appears increasingly unlikely to acquiesce in the type of measures that German and International Monetary Fund policymakers are demanding.
Elections are rebalancing the political power and increasing the number of fissure points through which the building pressures can be released.
The most commonly discussed fissure point has been for Greece to abandon the Euro as its currency. Although this might permit Greece to own a depreciating currency as a step towards restoring its competitive position, bringing back the drachma will likely accompany a devastated Greek banking system. There is a great fear, too, among policymakers that once Greece goes down this path other vulnerable countries, including Spain, will follow.
Another less commonly discussed fissure point is the possibility that Germany and a few other countries with relatively low debt burdens leave the Euro to the weaker economies, using the Deutschmark as their future store of value and means of exchange.
This could have less catastrophic economic consequences although it would be a severe blow to the pride of nearly three generations of European political leaders who have strived to bring about a union capable of eliminating a nasty tendency to genocide lurking below a thin veneer of European civilization.
A third possible fissure point comes from socialists playing a more prominent role. Just as the socialists seemed to have become a permanently extinct political breed, they have been given a chance to recover their numbers. Like the anti-communist Nixon opening the door to relations with China, it might take a socialist to bring government deficits under control, however instinctively uncomfortable market participants might feel about this possibility.
Socialists are generally internationalists favouring European union. They never really believed in the efficacy of markets or fiscal discipline so do not have an inbuilt inclination to impose them as solutions for every ill.
At the moment, the socialists seem better able to recognise that policy that is good for a single country may be counterproductive if applied to all simultaneously. There is a parallel with the crowd at the football. One person can get a better view by standing but, if everyone stands, none are better off. A good solution for one might not be a worthwhile solution for the many.
The French socialists and politicians on the left in Greece are more forcefully superimposing this perspective on the European predicament. They appear to recognise that no policy will be able to succeed without a firm base of support. A pure austerity model, however effective, may be worthless outside the university economics tutorial without popular acceptance.
The Francois Hollande or Syriza policy models, on the other hand, may move far more slowly toward any targeted fiscal adjustment but attract wider support.
For markets outside Europe, a slower start accompanied by a sense of direction may prove far preferable to a seemingly interminable, directionless debate about the appropriate policy.
Defining the political centre, which is where policy will have to be conducted for the longer term, may not be possible without first lurching from the political right to the left to define the parameters within which agreement must be reached.
To put a positive construction on what is happening, the chaos apparent in current circumstances might be a necessary evolution toward policy that can command a sufficient number of supporters to permit implementation.
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.