Austere Prospects

I keep harping on Europe – understanding its turmoil and anger – because what is happening there is constantly slamming the markets and upside in the United States. A selfish perception, I admit, but to get Americans to care these days, issues usually have to hit them personally in the pocketbook or their religious solar plexus. I’ve blogged about the impact of Europe directly on us – from sucking up global credit, tanking our banks with debt exposure there, slamming US companies selling into or operating in Europe and generally destabilizing global markets – and I’ve reminded Americans that Europeans still blame us for their economic woes by our successfully selling “sustaining lifestyle and corporate growth through excessive debt” as the modern way to go. But Europeans are obsessed with austerity as the only solution, even though this path – and one American that politicians have embraced with both arms – has brought misery to millions.

I spoke to a Greek friend of mine about what life is like in Greece these days, a nation that has changed governments and laid off 300,000 government workers (huge for a nation of 11 million people). Massive austerity was the price this country has to pay for rescue money from Europe’s Central Bank. It’s everyone for themselves these days as nothing in Greece is stable. In Athens, the Acropolis – the biggest tourist attraction the city… and maybe the country… has to offer – can shut down for a week or more, public transportation (even taxicabs) can vaporize for days on end, small businesses are closed, hotels are understaffed, and many are returning to villages to grow their own food and wait for it all to end. The rich have long since relocated their moveable wealth to secret bastions well-outside the reach of Greek authorities. Government telecasters may shutter. Hard to believe that this is a modern nation in once-rich Europe.

The northern European, euro-based countries – like France, Austria, the Netherlands and certainly Germany – have acted like angry parents chastising their southern counterparts, particularly Greece and Italy of late, for their unhealthy lifestyles, economic practices and their populist sentiments that favor safety nets over productivity. This “I told you so” mentality may ultimately unravel the entire European Union, but the unwillingness of European leaders – notably Germany – to reduce the borrowing rates of these southern nations by issuing Eurobonds based on the blended backing of the entire 17-euro-nation sector of the EU is forcing interest raise to rise is creating a vicious spiral … one which ultimately will add more costs to the successful nation to bailout later. Unless these richer nations want to the see the euro dragged down from the bottom, that bailout is almost inevitable.

The European Central Bank (ECB) has suggested that it just might let some of these troubled nations sink into the abyss if the initial stage of support proves insufficient. But in one rising phenomenon – what I describe as “what’s good for the goose is good for the gander” economics – the northern admonition of live within your means or face the consequence is coming back to haunt…er… the northern nations in the euro cabal. “[S]uddenly, as investors’ fears mount that many euro area nations are about to tip into recession, even countries like creditworthy France are finding it much more expensive to borrow money in the open market. And with that development comes a dawning realization: that austerity, rather than making it easier for them to pay down their higher debts, could make it harder — and more expensive…

“The so-called yield gap — the premium that investors demand for holding French 10-year government bonds, rather than German ones — rose [November 16^th] to a new high since the euro began of nearly two percentage points. It later eased back somewhat, to 1.9 percentage points… That is still not close to the yield gap of nearly 5.2 percentage points that beleaguered Italy has with Germany, but it is a disturbing new trend for France. Austria and Netherlands are also experiencing widening yield gaps with Germany, and Spain has become a new source for concern. ” New York Times, November 16^th. Credit rating agencies are downgrading European banks and even entire nations as the economic miracle of European unity begins to unravel.

Why does Germany refuse to budge in this onslaught of imminent and potentially dangerous contagion? Pure and simple: Hitler. The thought of guaranteeing profligate nations’ debt with pan-European bonds –primarily supported by the relatively strongest European economy (Germany) – makes Germans queasy from the possible inflationary surge that might result. They still carry historical images from the Post-WWI era of Germans with suitcases of near-worthless currency just to buy a small allotment of food, economic pain that provided the fertile and angry soil from which the Nazi party and Hitler took root, eventually sending Europe into murderous WWII.

Germans have since built their economy based on investing heavily in modernizing their infrastructure and manufacturing facilities, upgrading the skill-set of the already productive work force through expanded education and cherishing research. They are poised to take advantage of all these efforts, while austerity programs are forcing other nations to destroy their own futures – a prospect that could apply to the United States as well – by denying the funding necessary for these same investment categories elsewhere. Germany wants the fruits of its investments to remain German, probably not possible since they cast their fate to a common European currency, a lesson that is particularly hard for them to accept.

Thus, Germany and France are beginning to disagree on fundamentals. “‘The Germans have been able to rely on the French, the Dutch and the Austrians,’ said Simon Tilford, the chief economist at the Center for European Reform in London. ‘But if they get dragged into this and their borrowing costs continue to rise, that could influence whether they continue to back Germany and the line taken on the euro zone crisis.’… Analysts, though, say the time for insisting on ideology is quickly running out. Because European policy makers still have not started up the main bailout fund for Europe — the European Financial Stability Facility — there are virtually no other tools besides austerity to whittle down debts and deficits.

“But, said Mr. Tilford, the euro zone ‘is going to crack unless E.C.B. enters the picture soon.’ If the central bank really starts carrying out the lender of last resort function, then the crisis can still be reined in, he and others said… The question is whether the central bank is engaging in a strategy of brinkmanship to extract as many reforms from governments before it intervenes, or whether it genuinely intends to resist pressure to be a lender of last resort.” NY Times. And if Europe cracks, a whole pile of American banks and companies will crack with it. With all that downward pressure on our financial institutions and further evaporated credit availability, the impact on our own economy would be devastating as well.

I’m Peter Dekom, and bottom line is that “their big problem” is not just their “big problem.”