Photo: ceesjw (Cees Wouda)
Robert Zoellick the outgoing chairman of the World Bankis saying the world is heading for a repeat of 2008 unless the Eurozone problem is solved. The Eurozone is a big problem but not on this level for several reasons. Number one 2008 involved a problem directly in the world’s largest economy and while the Eurozone is larger than the United States in terms of GDP, keep in mind it is still separate countries – this type of analysis would be almost akin looking at North American GDP (including Canada and Mexico). If the Eurozone collapses, Germany its most important member slows, it does not collapse. The comparison to Lehman as a contagion is also off the mark. Lehman was the fear of a contagion because of derivatives which has so far proved to a solvable problem. It was AIG’s derivative problem that needed a government bailout and even that would not have been necessary had the rating agencies not created a “run on the bank”, something that never should have been allowed to happen. The real Lehman problem was the psychological shock to the system particularly as it was perceived the government had effectively kept Bear Stearns from just collapsing, so there was an expectation they would for Lehman as well. Beyond that, Lehman’s failure coupled with Bear Stearns effective failure both tied to real estate was the “proof” the market needed that the “emperor had no clothes” and that the unthinkable of a massive collapse of real estate prices nationwide particularly in single family was happening and that had never happened before.
The Eurozone collapsing is no longer a shock. When the end happens it will be like a person who dies after a long battle with cancer. The shock will be smaller, the mood will be sad, but it will not be the shock of someone dying in an auto accident. In 2008, we are unchartered waters or looking at something people thought was the same as the Great Depression – the complete collapse of the banking system. In Europe, the end game will be Europe will be back where it was in 1999 with countries with their own currencies – that is not so long ago and the world functioned in 1998 and 1992 and 1986 and most of us remember that. The process to get there will be messy for a while, but the outcome will not be unknown fear – it will be where Europe was for all of history except for the past 13 years. Even the value of when issued drachma will be known because it will trade, well “when issued” – we will know the value of the drachma versus the deutsche mark long before they are issued again. One caveat – would be a complete banking collapse in Spain – though I think the fallout from that will be more limited than the fear of the collapse of the American banking system.
Europe’s biggest problem is not what currency to use. Europe’s problem is the same as America’s and Japan’s – how to deal with a less productive ageing population that are living far longer than anyone anticipated years ago when so many social promises were made and without having enough young people to support them, even if they were all employed. Europe’s problems are more acute because the social promises run deeper than in the United States and because the United States still has some growth of young people even if it is from immigration and some of that illegal.
Then we have the Soros speech getting all the attention because of two terms “they have three months” and the Euro created a “bubble”. The bubble he is referring to is from structural flaws in the Euro and ECB that led to an overvaluation of sovereign debt. It is an interesting read if you didn’t already know this – but it is looking in the rear view mirror. The three months warning has been around before, perhaps most notable is his belief that Germany will cave into more financial support for its neighbours and it might. I think the harder problem is other countries willing to shed sovereignty – Spain apparently is bad enough that they will but before they said they won’t, but they will not do this on a country by country basis. Countries that are not in Spain’s position and even in a strong position like France are not going to agree to shedding any more sovereignty.
Keep in mind TARP barely passed the US Congress and failed in the House on the first vote. They need 11 countries to go through their own legislative processes to get the kind of legal realignment to do what that they need to do at a minimum – meaning it assumes no constitutions need to be changed and that constitutional issue might be most acute in Germany.
Soros’s speech today talks in detail on the structural problems with the Euro – some known at the time they thought could be glossed over (lack of a single political sovereign) and ones they didn’t (that all sovereign bonds are not the same and lack of a single Eurozone bond instead of separate sovereign debt).
The Euro was a flawed idea that should be put to bed. The sooner the process is started to return Europe to 1998, the better off we all will be – the world and Europe functioned well before 1999, remember that.