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Progress Report on the Crisis in Europe
For investors attempting to follow the shenanigans in Europe, it can be very difficult at times to understand what exactly is happening and how it will affect the economy as a whole.
The Greek Time Bomb
Since the European Union established a bailout deal for Greece in the early fall. The question is will Greece take the necessary steps in order to receive the bailout funds. Ever since the agreement within the EU was reached, the Greek people have been rioting and protesting against the proposal. The Greek nation has never been known for their willingness to sacrifice and over the past century, the Greek nation has gone through a number of financial crises resulting from their country’s fiscal irresponsibility and lack of desire to work.
As a result, Greece has still not been able to accept the funds, because of the government and people’s unwillingness to put in place severe austerity measures. Consequently, there has been extreme pressure by the European community as well as more conservative members of the Greek government for the resignation of the Greek Prime Minister, George Papandreou. As of last night, Papandreou’s resignation was confirmed. It is believed that former Vice President of the European Central Bank, Lucas Papademos will replace the old prime minister and lead the effort by the Greek government to muscle through the latest bailout plan in parliament.
Unfortunately, Greece is not the only country with economic problems that needs immediate assistance. Italy has its own problems. As of October 28th, 2011 Italy’s 10 years bonds are garnering 6.63%. This is extremely significant because when a country exceeds the 6.6% interest rate on their 10-year bonds it almost always means that the country is heading toward default unless intervention takes place. Italy has now over $2.2 Trillion in outstanding debt, which is more that Spain, Portugal, and Ireland combined. It is possible in the end that Eurozone bailout may occur.
The German Predicament
In the face of all this, Germany is still the main country, which is shouldering the expense for all the other countries’ fiscal irresponsibility. Angela Merkel, the German Chancellor stated after this last G-20 summit that, “The debt crisis will not simply go away,” Mrs. Merkel said. “It will certainly be a decade before we are in a better position.” These are hardly words of optimism coming from the country footing the majority of the bill for the irresponsibility. This brings up an interesting question. How committed is Germany to seeing the crisis through and is it possible for them to leave?
At the start of the crisis, Germany was very committed. They forked out large amounts of funds in a very short period of time. As the crisis has progressed, they have proven less willing. Recently, they were asked by the US, Britain, and France to sell of their 3,000 metric tons of gold reserves to contribute to new bailout funds. Germany firmly refused and stated they wanted to keep their gold reserves untouchable. The final question that has to be asked is if Germany decides they have had enough can they leave the European Union and the Euro and if they do so what will be the impact on EU? In a past ruling of the German Constitutional Court, they stated there were two reasons that Germany could leave the Euro. First, if the EU became an inflationary state and second if Germany became the “defacto bailout country of choice.” Both of these situations are not far from reality at this point, which leads to what will happen if Germany leaves.
In the event that Germany leaves. It is highly likely that the entire European Union will fall apart or at the very minimum the euro and economic union will be small or nonexistent. If Germany left the union, it would be the spark that lights the fuses of a dozen economic bombs that lie across Europe. In the end, the political future of Europe is far from bright and will most likely be the first domino to fall in the upcoming economic recession or depression.
