Bite The Bullet

Moody's just lowered the rating outlook for Germany, the Netherlands and Luxembourg to negative (currently AAA) because of the ongoing debt turmoil in Europe's South.  In other words, Mrs. Merkel, if you force a starvation diet onto your trading partners it won't be long at all before they stop buying BMWs and Miele washing machines.  Fiscal rectitude can go way too far, when imposed at the long end of a dogma stick.

It's time to bite the bullet and face facts: the EU is not a federal union a la USA.  Instead, it is a theoretical construct created by political and idealistic visionaries who had enough of perpetual bloodshed in Europe.  As such, it is irreplaceable and should never be allowed to fail because a bunch of short-sighted hacks cannot create a workable common monetary and fiscal policy.

Bottom line, once again: Spain and Italy, accounting for 22% of the EU's GDP, are now falling apart. It is plainly insane to think that the euro will survive Grexit, if it happens.  And it is certain that the EU itself will not long survive the demise of the euro.

...Time to bite the bullet...

Just A Quote

"Democracy destroys itself because it abuses its right to freedom and equality. Because it teaches its citizens to consider audacity as a right, lawlessness as a freedom, abrasive speech as equality, and anarchy as progress."

Isocrates, an Athenian orator ( 436–338 BC)

I dedicate this quote to all EU leaders:  Wake up ladies and gentlemen, they smoked you out THOUSANDS of years ago.  You can't keep on abusing "democracy", hidden behind the smokescreen of popular opinion...

One Picture Is Worth A Thousand Marks (or Merkels)

Given what is going on in the eurozone at the moment, it is worth it to point out that the biggest beneficiary of the euro is Germany itself - and by very, very far. 

Data:Statistiches Bundesamt

The German Economic "Miracle":  It's All About The Euro...

And where do Germany's surpluses come from?

Data:Statistiches Bundesamt

A full 41% of Germany's surplus comes from France, Italy, Spain and (gasp!) Greece, where Germany is still exporting like gangbusters despite the poor country being in its fifth year of recession.  In fact, Germany's trade surplus per person with Greece is 3.6 times bigger than that with the U.S. (290 euro per Greek versus 81 euro per American).
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.... and something totally unrelated, but still in the subject of "one picture worth a thousand..."

Photo Credit

Shanghai 1990

Shanghai 2010

Debt Distribution

We know that debt is not equally distributed across our society.  That is to say, lots and lots of people OWE debt but very few, proportionally, OWN it as an asset.  For example, everyone owes equally his/her portion of public debt through the issuance of Treasurys and other public-sector bonds (e.g. muni bonds), but a very small number of people ultimately hold most of those bonds in their portfolios, directly or indirectly.

Here are three charts which point to this imbalance, from the Fed's Survey of Consumer Finances.

In the first chart, we see that debt OWED is pretty well distributed among all income groups.

The picture changes dramatically in the next chart, which shows the distribution of financial assets, used here as a more general proxy for debt OWNED.

But even if look only at the distribution of bonds held directly by families, the picture does not change.

Poor, middle class and rich people all owe debt, pretty much alike.  However, it is by far the rich that are owed this debt - and the gulf between them has widened enormously in the last quarter century. In 1989, 90% of the people owned bonds worth around $100,000, while the top 10% owned $300,000.   In 2007 (latest data available) this picture has changed dramatically: 90% still own bonds worth around $150,000 but the top 10% holdings have soared to $900,000.

This enormous imbalance has serious social consequences, now plainly evident in Europe where people are being asked to slash their (formerly inflated) living standards in order to sustain a rickety debt structure.  It can't be done and it should not be done - at least not in this way.

Of Men And Their Donkeys

OK, Greek voters did what they could, never mind what they should.  In last Sunday's elections they favored one of the pro-eurozone, pro-bailout parties, admittedly with a slim (if comfortable at nearly 3%) margin over its left-wing competitor who called for tearing up the bailout agreement.

Greece is in an unprecedented fifth year of deep economic contraction with unemployment  over 22%.  If pushed too far by some of its dogmatic EU partners, Greece will simply fall apart and become a virulent failed state in the heart (yes, the heart) of Europe.  Certainly, reforms in the Real Greek Economy (tm :) are desperately and urgently needed, since the country had previously swallowed hook line and sinker the imported Pump - Borrow - Spend model for generating so-called "growth".

 It wasn't really its fault, if one of course overlooks cronyism, paternalism, corruption and cheating endemic in Greek politics since the early part of the 19th century (some would go as far back as Pericles).

There is no use, no profit, nay nay no gain at all in flogging a horribly overloaded donkey.  All we will get is a dead donkey and an upset cart, instead.

Stop Treating Greeks Like So Many Donkeys

What's to be done?  Here are some suggestions...

1) Stop beating the crap out of them.  Yes, that means mostly you Herr Schauble - God Above Mein Herr, STFU!!

2) Provide some immediate relief from the most onerous clauses of the Bailout Agreement by (generously) extending the time needed to reach a primary budget surplus AND reducing the size of the surplus envisioned.  Give them, say, five extra years and 1-2 percentage points less on the surplus needed.  In any case, I bet they will do better than that, if at the same time...

3) Promote sizable investments in the sectors where the Real Greek Economy has obvious comparative advantages: renewable energy (oodles of sunshine, wind, geothermal AND huge tracts of unused real estate up in the mountains of arid islands), shipping (e.g. at least three big shipyards sit empty), tourism (an old saw, but true nevertheless), second/retirement housing, organic/quality farming, software design (It's true, check it out. Highly educated and skilled professionals go for a song in Athens).

In sum, focus on REAL not just monetary/budgetary issues.  Go to it and lay of that damn whip, because what goes around comes around (and that also means you Mr. Fico, Prime Minister of Slovakia).

P.S.  An anonymous comment grabbed my interest. 

"...Investment? With your personal money, dear generous banker? Of course investment makes sense.
But no decent investment can start until REAL asset prices have come down in a significant way."

Here's a chart as an answer...

Greek share prices down 90% in five years

I think 90% is pretty significant, won't you say?  Here's another bit: at current prices, total market cap for the Athens Stock Exchange stands at a ludicrous 10% of GDP.