the EU financial crisis won’t be over any time soon

how the EU got into this fix

1.  For many years the EU ran a money policy that was just right for a Germany struggling with the integration of the former East Germany, which had been run into the ground economically during Soviet rule.  But that stance was much too stimulative for peripheral countries like Ireland and Spain.  The extra money sloshing around there found its way into highly speculative real estate.  This ultimately resulted in lots of bad bank loans.

2.  The big commercial banks in the EU served as a dumping ground for large amounts of toxic sub-prime securities from the US.

3.  Rather than recapitalizing its banks in 2009, as the US did, the EU decided to paper over their losses and hope that economic growth would eventually restore the capital the banks had lost.  That has proved to be a big mistake.

These factors have been well-known for years, however.

What’s relatively new is concern about the EU’s “bad boys,”  Greece and Italy.

4.  It took several years of truly heroic economic reform for Italy to meet the minimum standards for approval to enter into the Eurozone.  The other members might have hoped Italy would continue to strengthen itself once it was in.  But instead, Italy used the borrowing power of the euro to avoid any further adjustment to a fast-changing world, preserving an increasingly non-competitive status quo by running up excessive government debt.

In hindsight, Greece seems to have gotten into the euro only because all parties decided to pretend it met the minimum criteria.  Once in, Greece borrowed up a storm and lied about it for close to a decade–both understating the amount of debt it was running up and overstating its economic growth.  That deceit ended only when a new party took power in Athens last year.  If that weren’t bad enough, the big EU commercial banks appear to be on the losing side of billions of euros of Greek credit default swaps.

where we are now


The EU and the IMF are trying to arrange a partial bailout of Greece.  They’re doing so in a way they think will avoid triggering the CDS payout provisions, even though Greece will only have to pay back half of the face value of the bonds it has issued.  This is not a move calculated to win friends (or trust) among those who have been betting on Greek default, implying that the amounts are large enough that the banks can’t afford to pay.

The big question is whether Greece will go along with the austerity measures the IMF is proposing in exchange for debt forgiveness.  Another new government is in place.  It’s made up of “technocrats,” which means roughly that they’re supposed to wield a cost-cutting axe and then withdraw from public life.  But will Athens actually do any of the things it has promised?  No one knows.

The EU is simultaneously preparing Plan B, which would be to expel Greece from the euro.


Greece is poor and too small to matter.  Italy, on the other hand, is wealthy and too big to fail.  Italy, too, has just installed a new government of “technocrats.”  It has also successfully gone through a severe restructuring in the past, just to get into the euro in the first place.  So history says Italy can (and will) do so again.

my thoughts

Good news on restructuring in Greece or Italy will be slow in coming, because political processes take time to work out.  Bad news, on the other hand, like that Athens refuses to do anything, tends to surface right away.  Because of this, I think the news flow from the EU for the next few months will be generally neutral to negative and will be a net drag on world stock markets.

My guess is that markets are now almost fully discounting the possibility that Greece will leave the euro and that Italian economic reform will be slow but ultimately successful.  For what it’s worth, that’s also my base case.

I’ve argued in previous posts that the EU as a whole is already small enough in world terms that its likely economic performance isn’t enough to move the global needle one way or the other.

The real worry for non-EU investors is that failure of a large EU financial institution as a result of the EU’s cumulative problems will happen–and that this will have a Lehman-like negative effect on world trade.  I think this outcome is highly unlikely.

If that’s correct, we have two potentially negative influences from the EU to deal with in the coming months:

–uncertainty about Italy, and

–bouts of panicky selling by Europeans, for whom the crisis is far more important than it is for the rest of the world.

On the other hand, I agree with Goldman that a self-sustaining economic recovery in the US  is already underway.

My conclusion?  …avoid the EU for now and watch for potential weakness elsewhere to upgrade your portfolio holdings.

One response

  1. EU and Banks are Weapons of Mass Slavery
    How to Buy a European Country?

    They temp you; they fool you; then the EU vampire sucks each drop of blood and wealth in your nation. If you are lucky and not dead when they are done with you; you will remain in debt bondage and poverty slave for centuries.

    People must wonder, not the businesses, not the bankers, and not the politicians, can they really gain from joining the EU. “We must sacrifice for our country and our future generations” that is what they tell your politicians to tell the people to accept “austerity”. They want the people to pay for the debts of fraudulent local businesses; greedy banks; and EU agents. These debts are now considered sovereign debts. Why the billions are now considered national debts if some foreign thieves gave few bucks to local conmen and senseless entrepreneurs? The EU forces the governments to pay back EU bankers; but governments have no body to squeeze other than the people and national assets. Electricity; water; factories; airlines; or anything will go to foreign banksters. This is free market and the price you have to pay to clear your debts; be civilized; and join the rich democratic EU!

    Join the European Union; be part of the civilized rich Europe and the West; and Easy loans are actually weapons of mass destruction and very marketable imperial expensive products. Getting any rubbish business plan is the only requirement; of course with some nativity and stupidity. They come to you and give you free advice if you don’t have some extra cash; or they can write it in your debt books as consultancy fees. The marvelous outcome is that “Hurray!!! You are eligible for loans from our banks; don’t worry about collaterals or securities, we just want to help you to become rich and civilized like us in the EU” that is what they told hundreds; but they never tell the people that they are screwed.
    Why would banks potentially destroy themselves with such bad loan?

    Bad loans are actually toxic loans because they are poisonous. It is a calculated gamble and a secure one with the definite support from the governments of creditors, namely: Germany; UK; and France.

    I stated many questions about the initial silence and roles of these governments and their controlled EU institutions. Banks are too big to fail because governments defend them.

    Banks and financiers cannot be incompetent, have maladministration, or short-sighted. The same scenario was tried in the US in several bubbles; and who lost? The banks didn’t but the foolish and greedy customers did.

    Defaulting countries are now under exploitative control; it also happened in the past many times and in many countries.

    Take Egypt for example; it was forced to sell Suez Canal to pay back small debt for a greedy foreign ruler “Pasha” who Britain and France deceived him and made him believe that he is Ismail “the Magnificent”; and he can Europeanize Egypt because he is so great and visionary.

    Before him, his brother Saaid pasha was much under French influence, and in 1854 was induced to grant to the French engineer Ferdinand de Lesseps a concession for the construction of the Suez Canal.

    To the British, Said also made concessions to the Eastern Telegraph Company, and another in 1854 allowing the establishment of the Bank of Egypt. He also began the national debt by borrowing £3,293,000 from Messrs Fruhling & Gbschen, the actual amount received by the pasha being £2,640,000.

    Egypt financed and built the Canal and produced cotton; then what? They were forced to sell them for peanuts; or a song.

    Britain and France in November 1879 re-established the Dual Control in the persons of Major Baring and Monsieur de Blignières. For two years the Dual Control governed Egypt, and initiated the work of progress that Britain was to continue alone. The financiers and their governments tools were the winners and the common people were the losers.

    Blame Greedy Poor and Not Rich Banks
    The core of the problem was most likely irresponsible lending by banks. A credit bubble was created through banks’ lending out money to individuals and businesses to acquire assets that proved to be worth less than the amount of the loans. This was especially true in the real estate sector – something we also saw happening in the United States.

    What is called “irresponsible lending by banks” is actually a deliberate act of sabotage for the sovereignty of specifically targeted some European states.

    It is a replay of the tragic comedy “The Merchant of Venice”. Cutting a iuſt pound of his fleſh
    But can the money lenders take their loot without dropping blood?

    These debts were made with evil intentions and they must be either written off or rescheduled by the people without additional usury.

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