It’s good to be writing on here again after being temporarily sidelined by a broken hand. Luckily for this website, my colleagues Edison and Marshall have stepped in to provide you all with great content. With my hand still wrapped up like Darth Vader, I’ll only make a short, yet necessary, post today.
I want to talk briefly about Europe since the debt crisis is currently the greatest obstacle to growth in the developed world. I’m not really surprised to see the news today that the German Bundestag bit the bullet and increased the powers available to the European bailout fund. As I’ve argued previously, the German policymakers have seemed more than content to demand two mutually exclusive actions from the recessionary Greek economy (lower debt, higher growth). This leads to the conclusion that most of what Merkel and company were saying was really just rhetoric meant to bolster poll numbers at home; the german taxpayer being considered to be Euroskeptic. As many of us feared, the Franco-German leaders of the euro, rather than being bold and proactive, have shown themselves to be far more interested in muddling through the crisis with the hope of some deus ex machina (China?) resolving the crisis. Much like what we saw during the debt-ceiling debacle over here in the US, politicians took the opportunity to rally their bases until suddenly passing the needed legislation at the last minute. It seems Europe really is not immune to American political theatre.
What does this portend for Greece and the rest of the troubled European economies? Pretty much nothing too great as far as I can see. I don’t think the action by the Bundestag has convinced anyone that Greece will surely not default. In fact, I think the number of people who think Greece will default is on the rise. Furthermore, If you check out the Reuter’s article, or really any news update out of Europe, you will find out rather quickly that 10-year yields on Italy’s ”too-big-to-bail” economy have continued their increase towards the 6% range. This is not good. By “muddling through”, the euroleaders run the risk of losing control of the panic in the bond market at which point exit from the euro (by one or many of the weaker economies) or some massive change to the eurozone function (transfer union) are the only options that will prevent huge losses from debt exposure and a weakened currency.
Frankly writing this article I feel as if I’ve written it one hundred times before. I think everyone has. I suppose we can gain some confidence that Germany won’t become the tea party of Europe, sacrificing economic stability for the sake of poorly understood ideals, and will continue to provide the least necessary engagement in order to prevent total collapse. But unless we start seeing Italian bond yields settling down, Merkel needs to take this as a signal that the eurozone is not safe from collapse and that more action is necessary. I’m not suggesting a transfer union, but there needs to be more direct action to show the markets that Europe can take of itself without resorting to divisive nationalism and self-righteousness.
I’ll try and post something else in the coming days, most likely on opinions of growth in China. So keep your eyes open and please leave a comment!