You are here: Political Economy » Why I am not optimistic about Europe
I was on RT last Friday talking about the European sovereign debt crisis with Liz Wahl. The video is below but i have a few thoughts to add here as well.
I am not at all optimistic about the euro zone in terms of policy makers fashioning a solution to the problem. The euro leaders have the diagnosis all wrong. They keep harping on government debt and deficits as if that’s the problem. And this has caused them to go all in for austerity without a backup plan. The reality is that the sovereign debt crisis in Europe is not about government debt; it’s about private debt and intra-euro zone imbalances.
Look at Spain, for example. The government’s budget was in surplus throughout most of the 2000s. In fact, Germany, which is a AAA-rated country had a fiscal record significantly worse than Spain’s over the decade leading up to crisis. Yet Spain is now facing crisis. And it’s been almost two years since I wrote how Spain is the perfect example of a country that never should have joined the euro zone. The evidence is right in front of our noses. Yet euro area leaders still don’t get it.
Quoting from a post last week on Wolfgang Münchau and his analysis of the euro crisis, here’s why we see the debt and deficit fixation:
it’s because the government deficit story is an easier narrative to tell and simpler to attack within the existing institutional limitations of Euroland. That makes some sense politically, but it tells me that this crisis will continue to get worse.
So what is going to happen is that the periphery will swallow the bitter austerity pill only to find it doesn’t help. They will then all be forced one by one into the Greek death spiral. Portugal, for example, is seeing its CDS spreads rise alarmingly high – as if they will soon move into Greek territory. Spain and Italy are where the rubber will meet the road.
We do know that the Europeans won’t let Spain and Italy default. That much is now clear. So I think we will have to see another crisis which threatens either of those two nations before we get a more definitive policy response. This will probably occur sometime this year. Remember, we’ve been here before.
Meanwhile, as I say in the video below, the ratings downgrades are meaningless. Traders of European countries’ sovereign debt have long been signalling they see credit deterioration everywhere outside of Germany. And that means, politically that Germany will be asked to pony up. They will balk. But when the next crisis in Europe comes – and that will be Portugal in all probability – we’ll just have to see what the politics are. I think the ECB and Germany will step in with support as they have done before. But they will need to see another crisis before they are willing to do so. There is always the potential for policy errors depending on the political situation.
Bottom line: I am pessimistic about Europe right now. But I am always hopeful that policy makers eventually get it right when evidence of policy failure mounts.
I will be on CNBC this afternoon at 2PM talking about the FOMC meeting and other stuff like the euro zone. Tune in. If you miss it, I will post the video at some point later.
RT video below
About Edward Harrison
Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.
No related posts.
Like us on Facebook
Follow Edward on Twitter
- Why China cares about Japan’s negative rates
- My thoughts on the US Q4 2015 GDP numbers
- Is there a US Goldilocks scenario possible for 2016?
- The Saudis as the driving surplus oil producer
- The Fed rate hike and the potential for US recession
- When market contagion occurs, this is how it will happen
- Asset allocation in a period of wealth mean reversion
- The mess in Portugal is negative for debt sustainability
- Jensen: How long bonds could actually outperform equities
- Profit mean reversion and recession
- Credit Writedowns is ending paid subscriptions for now
- If we don’t understand both sides of China’s balance sheet, we understand neither
- Do markets determine the value of the RMB?
- China’s stock markets and revisiting 2011 predictions
- The Greece debt bailout negotiations are really about France, not Greece
- Did lending by foreign banks really cause the Greek debt crisis?
- The coming Greek bank nationalization, bail-in and privatization
- Variable geometry bites back: Schäuble’s motives
- The new European Union
- More on Greek Tax Anticipation Note IOUs
-  Brexit support swells, U.S. jobs numbers disappoint
-  China reserve depletion and Lynn Parramore on inequality
-  Yahoo's implosion and Auerback on the US
-  Rickards on China’s reserves crisis and Buffett’s oil play
-  Terzi on the economy and Japan’s currency war with China
-  Negative interest rates in Japan
-  Rickards on the case for gold as the Fed ‘tightens into recession’
-  DiMartino Booth: Index funds will suffer
-  Chinese markets tanking, Europe and U.S. stabilize
-  Steve Keen on debt and the next global recession