I'm back.
Spending 5 mos. on a European vacation must sound exotic. It is. But it's hard also. It takes a while to get back in the groove; to remember what you have in the closet, to remember where to find the flush lever on the toilet. To pick up where you left off.
I've been watching the wheels come off the European economy and it's like watching a train wreck. I don't want to look, but just can't take my eyes off of it.
I've written about how the northern complaint of “profligate southerners” being responsible for the problems is off the mark. How southern countries started from a less advantaged position and invested as they did to catch up. To become more competitive. And why that's been to the advantage of the northern countries and why they are still in an advantaged position. I may come back to that again.
To summarize: Spain relied too heavily on construction, Italy's small and medium sized businesses have been hammered by globalization, and Portugal never really got the ground before their markets disappeared in recession.
The problem right now has many dimensions. NY University Professor Nouriel Roubini hits the nail on the head twice in two pieces from last month here and here. That last in which he refers more particularly to Italy and to the problems as being of “stocks and flows”. Stocks being the level of accrued debt and flows being the financial direction and need for that borrowing. There are, or were, we may be past that now, a number of solutions to the stocks. But the best ones required the European Central Bank (ECB) to “print”. German intransigence, a cultural and inborn stubbornness, bullheadedness, and their refusal to countenance anything outside their established belief system makes that impossible. Verboten. And I know from whence I speak. More than once I've had lucrative deals fall through for less than Merkel's ridiculous insistence that Greek PM Papademos to sign a personal letter stating that he will pay her money back. Wolfgang Schaeuble, Germany's finance minister, wants every country in the EU to set up “redemption funds” to pay down their debt in excess of 60% of GDP. That's dumb. The issue today is to roll over existing debt, the stocks, at affordable rates. Paying them down can't come until the flows are reversed. And that's going to take a long time. It requires restructuring industries. In the case of Spain moving away from the dependence on construction. In the case of Italy finding new markets for their specialized goods. And Portugal, general recovery of demand in global markets.
And please don't think I'm just going off on Germans. It serves them in other ways, at other times, and it's partly responsible for their success, but it's not the time for that now. We all thought the harmonized market was going to work. It's only the Germans that can't see and respond to the problems now.
So, in addition to the problem of stocks and flows is the political problem. Merkel wants new treaties to give teeth to enforcing borrowing limits. No time for that now. Spain has a new government. Italy has a new government (acceptable to Germans). Greece has a new government. Belgium has a new government, finally. France will have one....
Private money is already out of this market (at affordable rates). Even the Germans can't sell a bond. The risk is that the panic infects the euro itself. It's no longer a negligible probability.
Update: This from Barry Ritholtz' blog which is along the same line of thinking and better stated.
