Can the Eurozone Survive the Economic Challenges of Greece and Italy?

[mheslep]

When and if the time comes, the Euro will leave the faltering country before the country leaves the Euro.

 

[AlephZero]

Hogwash. There is very little support for leaving the euro or the EU here in Spain. Yes, you get grumping about things having been better under Franco from some old folks, and quite a few do reminisce about the peseta. But no one in their right mind thinks leaving the euro is a good idea.

The people who moved about EUR 100bn from Spanish banks in the first 3 months of 2012 might disagree (that's about 10% of Spain's GDP). The capital reduction for the second quarter is expected to be "much bigger".

Because Spain does have a real economy...

... with an unemployment rate close to 25% (a straight line increase from a low point of about 8%), and more than 50% unemployment for people aged under 25.

Source: Financial Times (UK) reporting official Spanish statistics.

I think what people "want" is fairly irrelevant, given the ecomonic (un)reality of the situtation.

 

[Hlafordlaes]

Capital flight indicates tremendous uncertainty, but is not a vote for leaving the euro, rather a hedge. Of course there is fear.

Where the rub lies is in the increasingly obvious falsification of data across a broad spectrum of political party and banking shenanigans, this time from the right. We were all ready for the PSOE to leave power and experience some relief from the PP's "street" cred on the bond markets, which did in fact happen in the grace period following this Spring's elections.

Now that the Partido Popular (PP) is showing its full and true colors as the Tea Party* of Spain, all rhetoric and no brains, we are indeed truly in trouble.

[*Tea Party being the closest approximation, but it's worse than that. These are dogma-driven Catholic traditionalists whose rhetoric is of sound management, but whose actions are those of an old boys club, whose errors are mutually covered in collusion.]

 

[mheslep]

The only way of avoiding a break with the Euro is for the leadership in both the troubled countries and their sounder neighbors like Germany to announce clearly that even in the event of bank or sovereign debt defaults they will strongly support the Euro. They won't do that now for fear of harming those banks (private or central). Too bad. They don't have a choice any more.

 

[jduster]

Greece should have never been in the E.U. to begin with.

The whole world should not be teetering on the brink because of 1 or 2 unstable countries.

However, it's not palatable to remove Greece from the E.U.

 

[Astronuc]

Interesting commentary - Europe’s ‘Call Me Maybe’ Approach to Financial Crisis Management
http://finance.yahoo.com/blogs/dani...ch-financial-crisis-management-144011569.html

Let's review. America's financial panic ended in the spring of 2009. But Europe has been seized by a series of rolling banking and fiscal crises. So far, three constituent members of the euro zone have officially cried uncle and asked for bailouts — Ireland, Greece and Portugal. A fourth — tiny Cyprus, whose banks are heavily exposed to Greece and has been relying on direct loans from China and Russia — is poised to ask for help.

And Then There's Spain

. . . .

 

[Naty1]

Wisconsin, San Jose and San Diego (in California of all places] have taken the early steps
towards solvency:

2 California cities voters embrace pension cuts:

http://news.yahoo.com/2-california-cities-voters-embrace-pension-cuts-102049905--finance.html;_ylt=A2KLOzEdQs9PiTYApcXQtDMD

but it may already be too late for those cities because California is headed down and good 'ol Jerry Brown is not the person to fix it. Incredibly, governments workers in Wisconsin sport salaries and benefits more than 20% above the private sector there.

The Eurozone is a more advanced progressive made disaster of profligate government spending; It's difficult to see how they will retain the European Union.

Margret Thatcher proclaimed:

Eventually liberals run out of other people's money to spend.

Winston Churchill: "The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries."

Hence the situations we observe.

 

[Hlafordlaes]

@Naty1
The genesis of the crisis has absolutely nothing to do with the issues you frame above, nor do the subsequent events. The only applicable case is Greece, who set a retirement age of 50 and are nuts.

Think bank troubles -> bailouts with sovereign debt -> banks buy sovereign debt -> bank troubles -> bailout with sovereign debt - > banks troubles, ad nauseum. As for the success of austerity only, think 1937.

 

[Astronuc]

The bargaining has begun over a deal to rescue Spain's ailing banks, which have hoped to avoid onerous bailout conditions like those that hobbled Greece, Portugal and Ireland.

Spain Holds a Trump Card in Bank Bailout Negotiations
http://www.nytimes.com/2012/06/07/world/europe/spain-holds-a-trump-card-in-bank-bailout-talks.html

German officials have said they are prepared to weather a Greek exit from the euro if necessary, but no such claims are made about Spain. As such, Spanish leaders, who feel Madrid has already made many painful changes and spending cuts, are holding out for a deal that requires only a tightening of oversight on the financial sector and no strings attached to the country’s budget powers.

Spain also appears to be forcing a reckoning about the expensive steps political leaders in Europe need to take if they want to hold the euro zone together. . . .
. . . .
The wrangling over Spain underlines the way the European Union stumbles to solutions for each problem as it arises. Frustration has grown over the uncertainty afflicting the global economy as a result of Europe’s instability and the toll it takes on an already slowing growth rate. . . . .

 

[mheslep]

@Naty1
The genesis of the crisis has absolutely nothing to do with the issues you frame above, nor do the subsequent events. The only applicable case is Greece, who set a retirement age of 50 and are nuts.

Think bank troubles -> bailouts with sovereign debt -> banks buy sovereign debt -> bank troubles -> bailout with sovereign debt - > banks troubles, ad nauseum. As for the success of austerity only, think 1937.

That's largely backwards. What's happened is Bank Loans -> sovereign nations exactly because of the profligate spending to which Naty refers. Some of those nations now threaten to default on those loans, hence the banks are in trouble. The applicable cases include Spain, Portugal, Greece, Italy so far. Hollande just dropped France's retirement rate to 60. Greece's is 55 BTW, Italy 57, Spain 60. More relevant is the age 55-59 employment rate:
Germany 64%
Switzerland 77%

Greece 31%
Italy 26%
Spain 46%

All have aging populations, which is unsustainable in the latter three. So the 'genesis of the crisis has absolutely nothing to do with' ... bank bailouts, which are a symptom, not a cause.

 

[turbo]

At some point in situations involving unemployment/underemployment in younger workers, it can be quite helpful to let older workers get out of the way and provide job opportunities for the younger ones. This is not a popular concept in some circles, but it is a form of "spending" on pensions, etc, that can provide stability and revenues for the countries involved.

http://www.ft.com/cms/s/0/37d456dc-262d-11df-aff3-00144feabdc0.html#axzz1xAjjeDye

http://blog.nwjobs.com/careercenterblog/2010/05/us-retirement-age-work-till-yo.html

http://www.pemtechnology.co.uk/index.php?public/news/view/drop-the-compulsory-retirement-age-says-equality-commission

I am already effectively "retired" due to disability, but my wife is younger than me and is trying to figure out when she might be able to leave the work-force. It is very complex. Can you keep your health insurance at an affordable rate? Can you roll over your retirement accounts without excessive risk? Can you afford to opt out early if the rate of inflation increases and your reduced income is effectively reducing the buying-power of your money? These issues are not addressed properly (IMO) by the major media outlets. Too bad, because as the US population ages, and the numbers of young people who can find no work increases, we need to be willing to "spend" to find a balance.

 

[Astronuc]

Spain relieved, angry over humiliating $125B rescue for nation that was Europe's economic star
http://news.yahoo.com/spain-relieved-angry-over-humiliating-133958929.html

MADRID (AP) -- Spain's grinding economic misery will get worse this year, despite the country's request for a European financial lifeline of up to €100 billion ($125 billion) to save its banks, Prime Minister Mariano Rajoy said Sunday.

A day after the country conceded it needed outside help following months of denying it would seek assistance, Rajoy said more Spaniards will lose their jobs in a country where one out of every four are already unemployed.

"This year is going to be a bad one," Rajoy said Sunday in his first comments about the rescue since it was announced the previous evening by his economy minister.

. . . .

 

[Hlafordlaes]

That's largely backwards. What's happened is Bank Loans -> sovereign nations exactly because of the profligate spending to which Naty refers. Some of those nations now threaten to default on those loans, hence the banks are in trouble. The applicable cases include Spain, Portugal, Greece, Italy so far. Hollande just dropped France's retirement rate to 60. Greece's is 55 BTW, Italy 57, Spain 60. More relevant is the age 55-59 employment rate:
Germany 64%
Switzerland 77%

Greece 31%
Italy 26%
Spain 46%

All have aging populations, which is unsustainable in the latter three. So the 'genesis of the crisis has absolutely nothing to do with' ... bank bailouts, which are a symptom, not a cause.

Spain's debt-to-GDP ratio prior to the crisis was 62%, far lower than the 80-90% of Germany and France. Here the impact of the financial crisis hit an overheated housing segment, leading to bank weaknesses.

So, the profligate spending was actually more an issue elsewhere. Watch out for confirmation bias, looking for data to prove a theory rather than finding an explanation for real data.

 

[mheslep]

Spain's debt-to-GDP ratio prior to the crisis was 62%, far lower than the 80-90% of Germany and France...

France and Germany's debt-to-GDP were more like 65% prior to the financial crisis; they are at ~85% currently, though debt alone is not the main issue.

Here the impact of the financial crisis hit an overheated housing segment, leading to bank weaknesses.

Agreed, Spanish banks are in trouble in part due to a housing bubble.

So, the profligate spending was actually more an issue elsewhere. ...

For lenders setting the cost of money, the sustainability of the current *deficit* spending is the issue. Spain's deficit-to-GDP exceeded 10% in 2009 and is now ~9%, while Germany is at 1% and France 5%. Spain's deficit was brought on not so much by the financial crisis, but by large government spending increases: a 60% increase from 2004-2010, while France and Germany increased 30% over the same period. Furthermore, with Spanish unemployment at catastrophic levels there is little hope for the revenue side to bring Spain out of trouble.

Watch out for confirmation bias, looking for data to prove a theory rather than finding an explanation for real data.

Indeed. I find the level of denial about European government spending baffling. Likewise with the claims of spending austerity where, with a couple of exceptions, spending is flat or even continues to increase (UK, France, Germany) in absolute terms.

 

[Naty1]

Turbo:

At some point in situations involving unemployment/underemployment in younger workers, it can be quite helpful to let older workers get out of the way and provide job opportunities for the younger ones. This is not a popular concept in some circles, but it is a form of "spending" on pensions, etc, that can provide stability and revenues for the countries involved... Too bad, because as the US population ages, and the numbers of young people who can find no work increases, we need to be willing to "spend" to find a balance.

That is just a tad upsidedown and backwards.

If that is the only option, that entity is headed down and out. Excessive entitlement 'spending' by governments is the very essence of such disasters. Even James Carville is telling Obama based on focus groups and polling:

The correct answer is a simple one and a time proven one: economic growth. A bigger pie, not diviing up a fixed pie different ways. Get government bureaucracy, high taxes, excessive regulations out of the way of the private sector. As Larry Kudlow [economist] says: "Free market capitalism is the best path to prosperity."

 

[Naty1]

Spanish leaders, who feel Madrid has already made many painful changes and spending cuts, are holding out for a deal that requires only a tightening of oversight on the financial sector and no strings attached to the country’s budget powers.

maybe so, but 'Spanish leaders' are the ones who got themselves into the current mess.
So if I were them I'd be happy some other more thrifty leaders were willing to risk their
money after my silly decisions.

I'd like to see 'painful changes' detailed. A reteat from disasterously profligate spending, overly generous entitlements and onerous policies is better dscribed as "a return to responsible government'.

 

[mheslep]

When and if the time comes, the Euro will leave the faltering country before the country leaves the Euro.

For example ...

"There has been a deterioration in the situation in the past few days; I estimate that between €600 million euros ($750 million) and €900 million have been leaving the [Greek] system per day," said a senior banker at one of Greece's leading lenders.

http://online.wsj.com/article/SB10001424052702303822204577464783282542366.html

A sad disaster. The country seems to be largely shutting down.

 

[Astronuc]

The Spanish problem - borrowing from international banks/markets and making loans/mortgages on real estate - houses, resorts, commercial buildings. It was the huge volume of loans, in the billions of euros, that became problematic.

http://www.npr.org/blogs/money/2012/06/12/154876489/episode-378-how-spain-created-a-banking-monster

 

[mheslep]

The Spanish problem - borrowing from international banks/markets and making loans/mortgages on real estate - houses, resorts, commercial buildings. It was the huge volume of loans, in the billions of euros, that became problematic.

http://www.npr.org/blogs/money/2012/06/12/154876489/episode-378-how-spain-created-a-banking-monster

Spanish banks are indeed in trouble from a real estate bubble, but I think it is a myopic mistake to see the banks themselves as fundamental to Spain's troubles, which might lead to, for instance, a call for more banking regulation and all will be well next time. Instead the banks a symptom of long term policy mistakes: the Euro, restrictive labor laws, business laws and other laws that inhibit productivity and encourage dependency.

 

[JonDE]

Spanish banks are indeed in trouble from a real estate bubble, but I think it is a myopic mistake to see the banks themselves as fundamental to Spain's troubles, which might lead to, for instance, a call for more banking regulation and all will be well next time. Instead the banks a symptom of long term policy mistakes: the Euro, restrictive labor laws, business laws and other laws that inhibit productivity and encourage dependency.

I'm not following you at all. The bursting of the housing bubble is what caused the economic meltdown. The economic meltdown led to their debt problem.

Easing "restrictive labor laws" would not have stopped the bubble from forming, nor would it have stopped it from popping as the two are almost completely unrelated. You could argue that it would help it recover, but that does absolutely nothing about the problem to begin with.

 

[mheslep]

I'm not following you at all. The bursting of the housing bubble is what caused the economic meltdown. The economic meltdown led to their debt problem.

Sudden economic meltdowns do not create long term large sovereign debts, nor even untenable large deficits given restrained government spending. The major problem in Spain is the likelihood of the *government*, not the banks, finding itself unable to borrow more money and/or the *government* defaulting on its debts, all while Spanish policy puts it on the hook for rapidly rising entitlement spending. Look at Spanish government spending over the last ten years. The numbers tell the story. The bank troubles are merely the bump in the road that the top heavy government finally stumbled over.
http://www.oecd-ilibrary.org/econom...re-in-us-dollars-2012-3_govxp-table-2012-3-en

 

[Astronuc]

Spanish banks are indeed in trouble from a real estate bubble, but I think it is a myopic mistake to see the banks themselves as fundamental to Spain's troubles, which might lead to, for instance, a call for more banking regulation and all will be well next time. Instead the banks a symptom of long term policy mistakes: the Euro, restrictive labor laws, business laws and other laws that inhibit productivity and encourage dependency.

Interestingly, some European leaders are mentioning reform regarding labor and business laws.

A common currency such as the Euro is not inherently a mistake. It depends on how it is implemented, then how folks behave.

The plan will include measures to prevent bank runs and push for the repeal of regulations that hinder competition, keep young people out of the work force or make it difficult to start businesses.

European Leaders to Present Plan to Quell the Crisis Quickly
http://www.nytimes.com/2012/06/17/w...s-present-plan-to-quell-euro-zone-crisis.html

. . . . In addition, the plan will push for countries to remove the regulations and layers of bureaucracy that inhibit competition, keep young people out of the work force or make it difficult to start a new business.
. . . .

http://www.nytimes.com/interactive/...lobal/understanding-the-european-crisis.html?
http://www.nytimes.com/interactive/business/global/european-debt-crisis-tracker.html

Whatever Greek Voters Decide, the Euro Looks Likely to Suffer
http://www.nytimes.com/2012/06/17/business/euro-may-have-a-painful-path-whatever-greece-decides.html

. . . .
THE ultimate answer, Mr. Krygier says, is for European governments, led by his native Germany, to agree “on concrete and credible steps toward greater fiscal and political integration,” including the issuance of broader euro zone debt. That would eventually allow Spain and Italy to borrow what they need with Continentwide backing. In addition, he says, leaders should come up with a euro zonewide bank guarantee to avert full-scale bank runs in shaky countries.
. . . .

We'll find out tonight and tomorrow.

 

[chiro]

The other thing that I think some people are forgetting is that a loan or a credit arrangement is a two way thing, not one way.

If banks loan out way too much money, they also have to bear the risk that they take when the issue the loan and create credit. This means that they have to accept the possibility of a default in which they will ultimately take a loss.

The big thing IMO about a default between two countries is that when one country defaults against another, then there will be a huge impact with regards to trade between the country that defaulted and other countries. But if a country gets back on its feet and gets the wheels in motion (lots of examples of this like Iceland, as well as Argentina, Russia which had a ruble default which brought down LTCM), then things get better.

If I am stupid enough to lend you a million dollars, then I deserve what I get. You can't make credit/loans/bets/whatever like this and expect everything to always be paid back.

This is a very dangerous precedent to set in general banking where the lender has a gaurantee of getting most if not all of their money back, and if people don't see what dangerous precedent sets, then god help them.

 

[gravenewworld]

Greece should have never been allowed into the EU in the first place:

http://www.bbc.co.uk/news/world-europe-17108367

 

[Borg]

I found this article enlightening as to some of the systemic problems that have allowed countries to get to this point. I really don't see how it can last much longer. Even the best-case scenarios are just delaying the inevitable.

The 'Bang' Moment Is Here.

 

[mheslep]

A common currency such as the Euro is not inherently a mistake. It depends on how it is implemented, then how folks behave.

Well I suppose theoretically I agree, a common currency is not *necessarily* a mistake, but it requires some basic assumptions to work and the EU as assumed the opposite. Absent some kind of fiscal union, the assumption *must* be that yes of course their will come a Greece sooner or later. Of course their will be a country using the common currency to enable huge deficits while cooking its books. Then their *must* be an assumption that the response to the inevitable Greece will be that it will default on its debts, and that many banks in Greece will allowed to fail and many banks outside Greece that loaned it money will be allowed to fail.

But we've seen none of this, nor given human nature would we expect to. Instead we see central bank bailouts on top of bailouts. So I should have said: given human nature the Euro was a mistake.

 

[AlephZero]

So I should have said: given human nature the Euro was a mistake.

I would say, not so much a mistake as a (spectacularly) bad political judgement call.

The "elephant in the room" agenda by the EU's most enthusiastic supporters has always been full political union. That's what the Brussels bureaucrats still mean by "the project".

Everybody recognised that trying to impose political union from day one wouln't go down very well with the population at large, so the plan was to get there one step at a time, and a common currency was seen as a big step along that road. But unfortunately, the electorates of most of the 27 member countries still don't see full political union as the best idea since sliced bread - in fact, opinion might be heading in the opposite direction, but nobody is going to try the experiment of putting it to a referendum.

The EU didn't do itself any favors over this with the last round of treaty changes, when it was rather obvious that any country whose constitution that required a referendum to approve the treaty would have to keep answering the same question till it gave the "right" answer. (And the Greek elections might be heading the same way...)

 

[Astronuc]

I remember quite a few folks expressing misgivings about the Euro precisely for the reasons that the EU or Eurozone is now in trouble. Quite a few expressed concerns about the lack of fiscal discipline in some economies.


Pro-bailout conservatives win Greek election
http://news.yahoo.com/pro-bailout-conservatives-win-greek-election-205901474.html

So watch for a jump in the stock markets tomorrow.

 

[lisab]

I remember quite a few folks expressing misgivings about the Euro precisely for the reasons that the EU or Eurozone is now in trouble. Quite a few expressed concerns about the lack of fiscal discipline in some economies.


Pro-bailout conservatives win Greek election
http://news.yahoo.com/pro-bailout-conservatives-win-greek-election-205901474.html

So watch for a jump in the stock markets tomorrow.

Hard to say if there will be a big jump, if there's any at all. It seems to me the relative stability of the markets in the last few days makes me think the markets were expecting this election result.

 

[Borg]

Nikkei is up over 2% at the open. U.S. futures are still about even but that should change by morning.