High Noon In Euroland

By Administrator on October 20, 2011

World leaders and policy makers have been trying over the past 24 months to control the fallout from the Global Financial Crisis (GFC), circa 2008, and to revive economies across the developed world that are stuck in neutral. So far, success has eluded them.

Disbelief seems to be one of the few constants.

It is the disbelief of the jobless in America as they are watching an unprecedented display of political dysfunction and gridlock by their elected leaders inside the Washington Beltway. By now, most Americans have realized that neither the White House nor Capitol Hill can be relied on to solve their daily strife. Politicians are simply too busy playing partisan games and jockeying for the Presidential Elections of 2012 to worry about solving the real problems of their constituents.

It is also the disbelief by the hard working German middle class over the billions of their tax euros that have been sunk into the Southern parts of the European Union just to be siphoned away in corrupt government systems that find it easier to waste transfers from Brussels than to make their voters pay taxes.

 Policy makers of all stripes are trying their very best to avoid the mistakes made in the Great Depression and thereafter. And so they should; after all, the miserable state of the economy in the early 1930s was one of the incubators of fascism and the Third Reich.

However, other than continuing to print money, not much is left in policy makers’ toolboxes and what they have tried in the past, namely “Quantitative Easing” I and II, has had a disappointing effect on most. True, QE II did spur the 2010 rally in U.S. and global equity markets and those of us holding Apple (just to name one) were smiling for a while. However, job creation has remained sluggish and the U.S. housing market continued its slump. Wall Street One, Main Street Zero.

Reducing government debt that has spun out of control over the past couple of decades, is as laudable as it is necessary, but most developed nations have become so dependent on the public sector as part of their GDP that winding down government spending threatens the already fragile recovery in their economies even further.

As governments become more austere and reduce their footprints, unemployment will rise even further, simply because the private sector has learned to do more with less human resources. This is good for corporate balance sheets but bad for the working class that needs jobs to put food on the table. And it is bad for an economy like the United States that depends more than any other developed economy on consumer spending.

The Federal Reserve does the twist while Representatives across the political divide are shouting at each other. Consumer confidence is stuck at less than half of what it used to be pre GFC and disappointment with US politicians has made room to outright disgust.

The general feeling in Europe is not much better, as evidenced by the massive labour disruptions and civil unrest in Athens, to the Slovenian government being thrown out by a vote of non-confidence.

This is the breeding ground for a political drama that will be unfolding over the coming years. Nobody should underestimate the potential of the economic disaster of the past 36 months turning into a significant political crisis. Especially in Europe, where the frustration and disgust with the “classe politique” seems to be particularly elevated.

Labour strikes, demonstrations and riots will become a much more common occurrence across Europe as the disenfranchised and the frustrated take to the streets to voice their disapproval of government politics.

In the United States, we will see voters to the right and left neutralizing each other and the political stalemate on Capitol Hill continue, regardless of who makes into the White House a year from now. We will also watch how more and more cities will follow the example of Philadelphia and Kansas City in issuing curfews to make sure riotous youth with no hope are staying indoors rather than destroying storefronts and police cars. Violence will increase in the land of the free where the sale of new handguns has gone through the roof in recent months.

However, none of the riots and curfews in the United States will be as pronounced and politically dangerous, as the ones we see unfolding across Europe where the shifts could be much more seismic, still. While the United States have plenty of frustrated and disenfranchised citizens, the vast majority of the population continue to believe in the American Dream and the concept of the United States as one nation with a common purpose.

In contrast, the European sovereign debt crisis has brought to light how artificial and fragile the European union is, as a concept and as a reality. It has been said recently, that the European Union is a union of European leaders, not of European peoples. This statement speaks volumes.

Key European leaders are busy reiterating that the European Union will work through the current crisis and emerge as a stronger union, whatever the cost it will take to fix the mess the PIIGS are in. The question is not so much whether the “classe politique” in Europe has the will and stamina to see things through, but whether the populations of all the different member nations will let them do the job.

Interest in joining the Union by nations with applications stuck in Brussels red tape is currently waning as an increasing number of candidate countries question the value a membership would bring to their economies. Citizens of member states start to ask themselves the same question as they watch the sovereign debt crisis unfold. Most of them would rather see their taxes being spent on local roads, schools and hospitals than in never-ending bailouts for Greece.

EU member states will see voters carry their frustrations and anger to the ballot boxes over the next couple of electoral cycles, both on a national level and in terms of who is sent to represent them in the European Parliament in Strasburg.

It is not far-fetched to predict that the far left and extreme right will make substantial gains at the expense of the traditional centrist parties that have been forming governments across Europe over the past 50 years. Add in an increase in nationalist sentiment at the expense of European coherence, and Europe will become impossible to govern in as little as three to four elections.

This does not only spell trouble for the future of the Euro as a common currency but for the European Union altogether. Persistent economic troubles have been enablers for political extremism before. Even though these events occurred three or four generations ago, the memory of Europe post Weimar and during the Third Reich lives on, which is why more and more pundits are warning policy makers not to repeat the mistakes made in 1937 that threw economies into hyper-inflation and populations into endemic poverty.

The sub-prime experiment should have been contained, as an American problem. Instead globalization of the financial system allowed it to metastasize across the planet. Globalization makes for a good scapegoat. It is already widely vilified as the cause of the global financial meltdown we don’t seem to be able to get out of. And it may soon get blamed for rekindling nationalism across Europe.

Latest posts by Administrator (see all)

See Beyond

Receive Market Commentary + Stewardship Insights.

  • This field is for validation purposes and should be left unchanged.