By David Cooper, Fund Advisers Europe
Another European Summit happens this week in an attempt to find an answer (again!) to the Eurozone crisis of confidence.
It appears we shall see Germany pushing for greater degrees of Fiscal Union, as a trade for their continued support of the Eurozone failing economies. At the moment Germany is the only thing standing between many of the indebted countries and bankruptcy.
Ms Merkel would have Germany, the EFSF and the European Central Bank, support the failing economies, allowing them to remain liquid, able to raise funds from Sovereign Debt whilst implementing austerity measures to reduce deficits. Measures Germany would want agreed under the Fiscal Union – moving Europe closer towards becoming the ‘United States of Europe’.
Perhaps to understand how this has come about, it is better to look at why the Eurozone, in its current guise, has failed.
Many agree that the whole Eurozone Monetary Union was flawed from inception. With no provision made for the smaller, weaker countries to devalue their currency or manage their own interests rates outside of the agreed framework ( targets driven by Germany and France) they had little scope to remain competitive in exports markets, thereby they ended up growing their budget deficits and losing credibility on the International Government Bond markets.
Others dismiss this, they argue, and this is a view championed in Germany, that the failings are not within the system. The failings are of the profligate members who have continually failed to implement any fiscal discipline. They point to the Stability and Growth Pact limiting budget deficits to under 3% of GDP, and to have member states reduce debt/GDP to under 60%.
The European Treaties had complex mechanisms in place to gradually shift countries from joining positions to being compliant under the Stability and Growth Pact. However they were unenforceable and relied on peer pressure in the Council of Ministers to simply get an acknowledgement that a country would try to meet the agreed levels. Not that these were ever paid any more than lip service!
This allowed countries such as Greece, Portugal, Ireland and Italy to continue to operate outside of the treaty parameters with little risk of sanction. This worked whilst the world was in a period of economic growth, they even survived the downturn in 2007/2008, but the strain was starting to show. Now, however, the system has passed breaking point, as we have all seen.
The European Leaders have had many attempts to implement plans to fix the Sovereign Debt problems and get some confidence restored in the member states’ ability to service their debts. These attempts have faltered and then failed as they have been found wanting.
The UK Prime Minister favours what he calls the ‘Big Bazooka’ approach of massive cash injections to the market to restore liquidity and to get money flowing through the bank and into circulation once more. Allowing a larger degree of Free Market Economics to take over and once kick-started, drive the European economies into sustainable growth.
Ms Merkel and President Sarkozy believe that their elected offices should out-weigh the unelected power of Wall Street, the City of London and the other stock markets around the globe. Yet, they seem to forget that the Eurozone depends on the favour of the ‘Markets’ to fund the borrowing they so desperately need to sustain their economies.
It is as if the European leaders resent the power the markets have to affect the success of the measures they implement.
We should look at the speed that markets and governments react to stimulus to better understand the differences and resulting discourse.
The European leaders are trying to implement long term plans to secure economic stability. Their plans include measures likely to take months, or even years, to have the full desired effect. Small progressive steps, with underlying reductions in spending, are key for many countries to cure their economic systems. This, in theory at least, should work.
This Keynesian approach has supporters among many governments across Europe.
Unfortunately for them, it fails to show a true understanding of the Free Market approach of the ‘Markets’. Traders and investors are there to make a profit. If in making that profit, recent government policies are undermined, or destabilised, then that is to the markets, an acceptable outcome.
Markets have the ability to react quicker, and in many cases much more strongly than governments – even the strength of Germany has been tested, and found lacking in recent months.
European leaders need to come to terms with the strength of the investment markets and find a mechanism that brings both short term relief for their ailing economies, a feeling of confidence in the markets and a restriction on the effects of a market swing against them – a fine balancing act!
Later in the week we will look at how the European Summit affects things and where Europe should be looking for inspiration and what lessons can be learned from events in South America and Asia in the 1980’s and 1990’s.
We will also look at what impact today’s news of falling unemployment in US has, and where this could develop in coming months.
Fund Advisers Europe
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1206 Geneva
022 347 00 52
www.fundadvisers.eu
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Author Bio
David Cooper is a Director of Fund Advisers Europe, a Financial Services company offering a broad range of Investment and Insurance Services to clients across Europe and Latin America. The majority of David’s early experience was gained by working for Lloyds Bank in the United Kingdom. David now has over 20 years' experience growing wealth management brokerages throughout Europe, the Caribbean and Latin America. The primary objective of his role at Fund Advisers is the creation of growth in Fund Advisers’ Wealth Management & Discretionary Fund Management division. David lives in Geneva with his family.
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