My Six Thoughts and Observations on the Euro

As the Greek election furor dies a quite death and as of today Greece has formed a new government.  I have been reflecting on the question, ” Was the fear and panic leading up to the Greek election on June 17, 2012 worth the bother?”

So for what it’s worth here are my thoughts and observations on the euro.

1.  The only people who think the euro will fail are those who reside and work outside the Eurozone. Why?

Each Eurozone currency note has a country code.  An “X” before the serial number denotes a euro from Germany and a “Y” denotes a euro from Greece.  Certainly if the news were as bad as the press believes there would be hording of the “X” bills and spending or refusing of the “Y” bills.  As of last week, there is no sign of this happening in Spain.  (This comes from a first hand account of a good friend currently vacationing in the Costa del Sol region of Spain.  Also the restaurants are packed according to my source.)

2.  Anyone with an Econ 101 university course knows what to do to fix Europe’s financial problems.  Martin Wolf of the Financial Times points out every week what should be done and how to do it.  Unfortunately, all of the answers reside in the political arena.  My favorite line in the movie Godfather III, “finance is a gun, politics is knowing when to pull the trigger.”  It could be years, maybe decades before any government pulls any trigger.

3.  All of the European banks are bankrupt!  Since 2008, all of the banks in the Dow Jones Euro Stoxx 50 have been trading under EBV-3, or what we call deep “in the blue”.  Unlike, the United States and the United Kingdom who has rescued their financial institutions and is in the process of cleaning them up, Europe has yet to act.  Certainly any road to recovery for Europe must start with the clean up of their banking system.  Which for one reason or another Europe is loath to do.  Over time the interconnectedness of the European financial enterprises will disconnect from the global financial system.  The market will demand this.  In 2008, a bank was only as strong as its counterparty.  The market will not tolerate a weak European counterparty in the global financial marketplace.

4.  Europe’s underground economy must be huge.  This is the only conclusion one can draw.  The financial headlines and the facts on the ground just don’t match up.  To me this is a generational phenomenon and will probably take generations to change this mindset.

5.  Germany likes this situation.  The Euro has been moving lower against the US dollar/Renminbi currency peg.  This helps Germany’s export machine and the current account surpluses continue to pile up.  When “what ever” crises’ reaches a boiling point Germany moves slightly.  By placing a Band-Aid on the wound or throw a few Euro notes at the problem to alleviate the tension.  Secondly, Germany has hegemon over the whole Eurozone.  Germany may have lost the first two world wars in the 20th century, however they won the economic war of Europe in the 21st.

6.  One of the major advantages of a currency block is labor mobility.  The US has the most mobile labor force in the world.  If the Northeast is in recession, individuals pack up and move to the Southwest.  Will this be true for Europe?  Employment should realign itself internally. Young people hopefully will gravitate where the financial opportunities are the most plentiful.  Which will mean out immigration of the PIIGS to the northern part of Europe.  If not, then immigration will occur internationally.   I’ve been hearing of immigration out of Ireland to such places as Saskatchewan where workers are needed for potash, mining and agriculture.  Hard working Northern European workers retiring to the Greek Islands is equivalent to New Yorkers’ retiring to Florida.

Conclusion

I guess this European mess seems obvious to me.  There will be NO grand solution or TARP like bazooka to fix anything.  Think Japan – slow growth with challenging demographics.  Some countries in the Eurozone will thrive others will be zombie like.  Decades if not generations will be needed to fix a continent that was formed to rival the United States.

What is the downside to this?

Not much I believe.  I can point to Japan.  Japan has been sliding for over twenty years economically speaking and world commerce has grown tremendously over this period of time.  The Japanese people don’t seem to mind.  Like I don’t think the majority of Europeans will mind twenty years from now.

What everybody worries about is what has become known as the “Lehman Moment”.  If a European bank fails or Greece pulls out of the Euro, and the credit markets freeze a la 2008.  What if the “Lehman Moment” doesn’t happen after a European shock?  Yes, there would be a substantial rally in all asset classes, except US Treasury bonds and German Bunds and the world will continue on without any regard for Greece and European financial issues that plague us today.  In other words, Europe has been effectively ringed fenced making the world happy as well as Europe.

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