For more than two years now Europe keeps pumping out alarming news. Crisis summits almost once a month, I stopped counting at 25. We are flooded with polarizing information like austerity measures versus stimulus packages, disciplined Northern European countries against an easy going Club Med in the South and rating agencies downgrading banks and entire countries in the Eurozone on a regular basis.
Breaking news like Spanish 10-year bonds had hit a record high during the Euro-era and Germany’s new negative outlook in the eyes of Moody’s don’t spread any confidence either. All very confusing, isn’t it? What are the root causes? Let’s take a break and look back in history.
15 years ago, the Euro was still young, just the announcement of a single currency led to low interest rates all over the Eurozone. Unfortunately, like hundreds of years before, at any given time during the Euroera, Southern European countries were not as competitive as their Northern counterparts. But suddenly –heaven sent- an unexpected miracle disguising as low interest rates allowed all over sudden to borrow more money than ever before. Overnight the party was on.
Real Estate Boom in Spain, Public Service growth in Greece. Everybody happy until September 2008! In the wake of what had happened to Lehman Brothers in the US, the leading banks of the world reviewed their credit portfolios and all over sudden had got cold feet looking at Europe’s periphery. Interest rates in the South started going up, credit facilities and bonds were not renewed, consequently trade balance deficits started building up. De facto since 2008 a “transfer union”, something politicians in the North of Europe wanted to avoid at any cost is already in existence! In figures, Germany alone instead of getting properly paid for exports to the Eurozone has built up a claim against the EZB in the amount of more than 800 billion Euros. A claim, annoyingly, you can forget, if the Euro fails. Here we are at the core of the problem. Not so difficult to understand, is it?
In other words, we are actually in the 5th (!) year watching the rescue of e.g. Greece. But stop, to be more precisely, nobody of course saves anyone in Greece. What I meant is the rescue of banks and private investors, who lent too much too long to the Club Med and understandably now try to find somebody to take over their foul portfolios. Amazingly, however, neither the gazillions of self-declared experts on TV nor politicians nor the mainstream media seemed to realize what’s going on until late 2011. I wonder why that is? Looking for a solution for this mess, we better get used to the idea that there is no sugar coated way out.
The alternatives are simple: The South becomes more competitive (what will not happen overnight) or the North continues sending checks. While deciding this tricky question, it probably also is a good idea to look what’s going on in the rest of the world. Will cars from the Eurozone in future e.g. be in a position to compete against cheaper brands from China in Brazil? Will the Eurozone play a role in getting a reasonable chunk of the Indian, Chinese and South East Asian markets?
At the end of the day the crucial question is: Will the Eurozone continue to play an important role in the world or become a dying dinosaur with a socialist banking sector other countries avoid like the plague. A question, that seems not to be on the radar at present. Last not least a word to the famous “Stability Mechanisms”.
It seems highly improbable that EFSF or ESM will solve the crisis. But one thing those vehicles will achieve: In the not too far future most bad loans from private banks and other big scale private investors will be the responsibility of the European taxpayer. And, aah, you just asked yourself, who is going to pay for it.
Well, I am sure deep down inside you know… Courtesy of Christian Rasp Director CRMC (Thailand) Co. Ltd. Mail: email@example.com Editor Note: Khun Chris is a well known international banker and businessman with interests in China – Hong Kong, Europe and Thailand, he is also the owner of Beach Café & Restaurant in Hua Hin.