Thus far in this incipient series I’ve written about some of the political and constitutional aspects of the Eurocrisis, but at the end of day this is mostly a matter of dollars Euros and cents sense. The weak agreement reached last Friday is surprisingly similar to the weak climate agreement reached almost at the same hour down in Durban—large on sentiment, but lacking meaningful specifics or an enforcement mechanism. The debt hole that needs filling is somewhere north of $1 trillion, but the bailout fund is only about $230 billion—how’s that going to work?
Perhaps the most pungent assessment comes from Brit journalist Ambrose Evans-Pritchard, who says, among other things:
All this upheaval for a mess of pottage, a flim-flam treaty? The deal is not a “lousy compromise”, said Angela Merkel. Well, actually that is exactly what it is for eurozone politicians searching for a breakthrough.
It tarts up the old Stability Pact without changing the substance (although there will be prior vetting of budgets). This “fiscal compact” is not going to make the slightest impression on global markets, and they are the judges who matter in this trial by fire.
Last week I attended an off-the-record briefing from someone I can’t name who has been on the inside of several sovereign debt defaults and restructurings over the last couple of decades, and who is shuttling between European finance ministries on a regular basis right now. This person made several points, a few of which have not appeared in much of the news or commentary on the scene. From my notes (with my embellishments in parentheses):
—The European political class doesn’t understand markets, and doesn’t like markets. The resent the pressure global financial markets are placing on them, which helps explain why they are lashing out at “London bankers.” (Apparently they have completely forgotten how Britain railed against the “gnomes of Zurich” during Britain’s currency crisis in 1964. What goes around comes around.)
—The default mode of politicians is to compromise, but compromise won’t work on this problem. The European political class is still in deep denial that the solutions proposed so far simply won’t work.
—Southern Europe believes that richer Northern Europe owes them a bailout. Solving the problem requires breaking the entitlement mentality of the weaker members of the EU. Moreover, wage levels in Southern Europe are too high by about 25 percent. Adjusting this problem ever over the long term is going to be extremely painful for the southern economies.
—France keeps siding with the weaker members and undermining Germany, even though it is against France’s own fiscal interests, because France would like to grasp leadership of the Euro zone away from Germany. (Maybe Germany should occupy Alsace again?)
—The Eurozone is likely to slip into recession next year, which will drag down growth in the U.S.
My financial interlocutor offered up a couple of other axioms worth keeping in mind, such as: “A monetary union that can’t make up its mind is a crisis waiting to happen.”
And this one, which could apply to Middle East peace talks and other arenas: “99 percent of the trouble in the world comes from too much talking.” Europe’s government should shut up and get down to action. They won’t.
Bottom line: “You have to say no [to bailouts of Greece, etc.] and make everyone believe you.” This is going to drag on for several more months—if not years—with a familiar pattern of crisis, emergency meetings with new patchwork agreements that calm the markets for about 48 hours, until everyone sees that nothing has been fixed, and the cycle restarts itself.
My bottom line: make sure your investments have seat belts and air bags.
UPDATE, 8:45 a.m. EST: European markets and Wall Street futures appear to be unimpressed.