Europe…….. sigh

 

Latitude has been doing a great job of keeping us updated on the volatile European situation.  I’ll try to boil it done to some sort of coherency, though, there’s not much of that going on over there.

As most of us know, Greece has been in dire financial straits for quite some time.  They are part of the Eurozone.  Greece’s trouble became critical when the recession hit.  The countries of the Eurozone have been propping Greece up with injections of capital to keep the country from financial collapse.  But, the payments came with the condition that they curb their spending.  You see, Greece had so much deficit spending for so long, that they finally were unable to make the interest payments on their debt. 

Greece recently had elections which basically removed the people who had signed onto the agreements of curbing their spending.  The Eurozone(Germany) has stated no cuts, no payments to Greece.  And whose to blame them.  The Greeks want to do nothing and have the Germans work for Germany and Greece.  It’s a great gig if you’re a Greek.  Not so much if you’re a German. 

So, now there is a high likelihood that either Greece or Germany will pull out of the Eurozone.  Either action will have devastating effects on the Euro, and it has global implications.  Greece, whether in the Eurozone or not has not demonstrated that they will do what is necessary to keep their country solvent.  Many banks are carrying Greek notes as well as Italian and Spanish debt.  People are now clamoring to remove their money from these banks because if Greece defaults then these banks may not have the capital to pay their own debts. 

And this brings me to something I’ve tried to shed some light on but I seem to be getting very little traction.  There were two very important lessons the recession should have taught us but didn’t.  First, we should have learned that banks carrying toxic notes is a horrible thing to count as a asset at face value.  The rate of interest makes no difference if they aren’t going to make the payments anyway.  This is a stupid form of banking.  (the riskier the debt, the higher the interest rate)  It creates a mirage of income and assets which are not there.  Banks buy these useless notes and count them as assets.  The banks here and in Europe have done nothing to fix this problem of worthless assets.  And, they’re still borrowing against them.  It’s like me writing a check and telling you not to cash it because I don’t have any money in the account and you keep it pretending that the check has a value.  We didn’t do anything to fix this!!!!

The second problem which was entirely ignored and not even articulated is the problem of our global economy, our interconnectability.  We can argue the causes of the recession, but what isn’t disputable is that how one nation’s difficulties effect everyone else’.  How is it that a piss-ant nation such as Greece whose economy isn’t what many states in the U.S. have, effects global finance?  We all stand a substantial risk of falling back into a double-dip recession because we’ve done absolutely nothing to buffer ourselves from this inanity. 

Here’s how I see this playing out.  Greece will default.  They have refused to act like an adult and any adults left are leaving the country.  The Eurozone will have to cut them loose.  Italy and Spain will follow suit.  But, that won’t be enough to prevent Germany from bolting from the Eurozone because France elected a socialist and they will not cooperate with Germany and do the necessary things to fix the impending crisis from Greece defaulting.  The Euro will collapse.  This will ripple to the U.S. and around the rest of the world and back down we go.  We’ll have a double dip recession, but, it won’t be as bad as Europe’s. 

There is an alternate scenario.  And as bad as the one above sounds, this one is worse.  So far, acts of violence have been pretty much confined to Greece and Italy in regard to these economic issues.  In spite of what people tell you about causes of war, they are almost always because of economics. 

Most people in the U.S. don’t have a very good grip on historical implications of Europe.  I’m hesitant to bring this up because I don’t wish people to get the wrong impression.  But, I don’t write so people won’t get offended.  I write to get people to think.  A unified Germany (even younger than the U.S.)  must not be isolated.   The U.S. and the U.K. should immediately reach out to Germany and assist them in their transition from the Eurozone.  The rest should be left to either sink or swim.  Too many of them would serve as lead weights in a swimming pool.  If you’re wondering why I state this, you should read some history starting with the Holy Roman Empire and work your way through with your focus on the German states.  Pay particular close attention to Fredrick the Great and afterward. 

Spheres on a plane await.  I’ll bbl.