Saturday, June 30, 2012

The New European Solution

The agreement reached on Thursday in the Eurozone sparked a major stock and bond rally in world financial markets.  There was a nearly two percent pop across the globe.  The agreement basically made each country responsible for every other country's commercial banking system.  The next step will be Eurobonds, which makes every country responsible for the sovereign debt of all the other countries -- "joint and several" is the usual phrase.

Nothing, of course, in the agreement reigns in the growth of that sovereign debt or in way repairs commercial bank balance sheets.  There is just a new signatory -- Germany.  Now, if one looks only at Germany and ignores the rest of the Eurozone, it is clear that Germany itself is on the road to financial ruin, long before taking on the indebtedness of the likes of Greece, Spain, Italy, etc.  The main thing that these agreements do is to eliminate any rational reason for the profligate countries to take any measures to curb their budget deficits or fess up about their commercial banking problems.

In American parlance, Europe has adopted the "extend and pretend" model writ large.

This will, briefly, postpone the day of reckoning -- maybe a week, maybe a month, maybe three months...but not much more than that.  Then what:  Have the man on the moon guarantee Germany's sovereign debt?

To see a defense of this madness, read Laura d'Andrea Tyson's column in the New York Times this morning.  It spells out the usual stuff about how austerity doesn't work, which translates to "let the deficits ride to infinity."  Tyson is among those that think that laws that prohibit firing don't really matter much to entrepreneurs.  It must be nice to look at this from 30,000 feet in a business class seat and to not face the hard realities that Italian and Spanish business folks face every single day.  Maybe on a clear day....

As we have pointed out ad nauseum in this blog, the issue in Europe is one of arithmetic.  Sovereign deficits are spiraling off to infinity, while the economies, hampered mainly by over regulation and the welfare state (and not austerity...there is none), are grinding to a halt.  Having mother Germany step up to the plate is largely irrelevant to where this all ends.  It just means that Germany will suffer the same fate as everyone else. 

There is no arguing with numbers. Unless the growing gap between spending and revenues is reversed, which, at present, there are no agreements to do, then sovereign debt in the Eurozone will continue to march toward the sky and bond buyers will continue to run for the exits.

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