A Few Brief Euro Thoughts
There’s been some reassuring comments in the last 24 hours out of Europe. I’ll highlight below:
Via CNBC: ”We expect the conclusions of the EU summit will be more solid and credible compared with previous summits as far as growth is concerned,” Monti said after a four-way meeting in Rome.
German Chancellor Angela Merkel, French President Francois Hollande, Spanish Prime Minister Mariano Rajoy and Monti also want the June 28-29 summit to come up with a “clear medium- and long-term vision for greater integration” in the euro zone, he said.
Finally, next week’s summit should “put at ease the financial markets expectations,” he said before shifting into English from Italian to add “that the euro is here to stay and we all mean it.” (emphasis added)
And then on a potential fiscal package to aid growth:
Via NYT: ROME — Leaders from the leading euro zone economies pledged Friday to reinforce the single currency and to push together for a 130 billion euro program to stimulate economic growth.
After a two-hour meeting here, the leaders of France, Germany, Spain and Italy also pledged to give a clearer, more comprehensive vision of the future, while acknowledging the serious crisis sweeping the Continent.
“The 130 billion euros is a strong signal,” French President Francois Hollande said at the news conference following the private meeting, and is part of “a road map that presupposes fiscal and banking union.”
I don’t know about you, but this sounds like pretty definitive progress towards a better understanding of what Europe needs to do to resolve the crisis and a near certain sign that the Euro won’t be allowed to collapse into oblivion. There’s hope for this world yet.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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36 Comments
Tim Duy has a good post that brought up something I haven’t seen here:
What does everyone mean by “fiscal union.” His thoughts are worth considering.
http://economistsview.typepad.com/timduy/
Good link. Yes, a transfer union is the only kind of fiscal union which will save the euro, and Germany won’t tolerate it. What’s now becoming clear is that neither will the Dutch. This is dangerous. The Dutch, a financial cornerstone of the EZ, has elections in September (worth putting in your diary) in which most of the parties are anti-austerity and even anti-euro.
http://uk.reuters.com/article/2012/06/01/uk-eurozone-esm-dutch-idUKBRE8500MZ20120601
Cullen comes at this from the standpoint of economic logic and common sense. From a non-EU citizen’s point of view that’s understandable. He is watching what the leaders say – he cannot believe they will ‘allow’ the euro to break up. But the assumption that they are in control is a fundamental mistake: Europe’s leaders are not going to be the ultimate arbiters of the euro’s fate, their people are.
Once you work through the various potential scenarios, it’s clear that this remains true whatever the short or medium term outcome. It’s true whether the European economy deteriorates further from here or not. It’s true whether the politicians manage to kick that can again on June 29th or not. Even if Angela Merkel suddenly decided to go ‘all in’, it remains true – because to do so she would, by law, require the consent of her people in a referendum. And at 60/40 in favour of staying in the euro, it’s not just that German citizens are not interested in funding the profligates of Europe, they are closest of all major EZ nations to the exit door.
http://www.bloomberg.com/news/2012-06-24/germans-show-lowest-support-for-keeping-euro-in-four-nation-poll.html
Sooner or later, the citizens of at least one European nation will be compelled to perform a straightforward cost / benefit analysis. For some nations, this will be ‘The benefit of staying in the eurozone versus the cost of driving our economy into the dust’ (Greece will be forced to make that choice again and again until they quit). For others it’ll be ‘Keeping the Greeks, Portuguese etc. in the eurozone versus giving up our sovereign democratic rights and paying those countries’ bills in perpetuity’.
The result of these cost / benefit analyses can be in no doubt whatsoever. The euro will break. And while the timing is uncertain, I’d expect it to happen when no one’s ready for it.
Baby steps towards a fiscal union. Cullen, isn’t this commentary enormously bullish? a fiscal aid package could put a bottom in on the economic slide and the removal of the worst case scenario for Europe (total collapse) seems like a big net positive.
Bullish in the long-run, I think, as the EU will eventually benefit from fiscal union.
But in the short-term, this means some combination of:
1) slow, painful deflation and deleveraging for the PIIGS, and/or
2) continual bailouts from the rest of the EU.
I suspect #1 will continue, and that unless the ECB loosens considerably, the PIIGS are going to see one hell of a recession while they slowly correct the EZ’s sectoral imbalances.
On the other hand, if the ECB loosens, the Euro should drop, which will be bad for the US; drawing jobs away from the US to Europe.
Any way you cut it, it’s no fun to deal with bad loans and lending practices. Of course, they have to deal with the sectoral imbalances, so we’ll lose the artificial demand that came from Greece spending beyond their means. And that’s painful enough. But I expect we’ll also see an additional drop in consumption from Italy and Spain, as these countries deleverage; as they pay down their debts to the satisfaction of EU bond vigilantes. I think the “risk off” mentality is really starting to sink in, as more people understand and fear the European fiscal setup, which will drive Italy/Spain deleveraging further than it really “needs” to go.
Investors are betting they won’t move to fiscal union…seems like a bad idea. They will most likely kick the can down the road with a promise to commit to the fiscal union and centralized government. They will need to change the treaties to fully be able to integrate tighter, so coordinated effort between ECB , EFSF, ESM, and other central banks will be necessary to calm markets while they debate the treaty in their own parliaments. Market is looking for blood, and whiplash to the upside is high here.
Chad M
“Investors are betting they won’t move to fiscal union…seems like a bad idea”
Really??? what part of not having one for 18 years is a bad bet? I mean really.
They don’t have one! If they wanted one then why don’t they have one? Further…look at this nonsense. The NYT, CNBC all gettin more pledges to pledge to be clearer to pledge? What part of being lied to does the public not get.
You only have to open your eyes to see the truth. Why get delusioned into the close on a friday?
Until it’s fixed it’s broken. And so long as Germany remains German good luck. Only those in trouble want Germany to bail them out. This is probably the last bit of whipsaw up to 1400 or so before this thing goes BANG into July.
ODD isn’t it….all the lovely hand holding European Bullish Peace and love going on into the end of the quarter. 130 billion?? who get’s the money? what are they going to do…re-do the 15th century architecture? buy out Nokia? give money to Greece so they can buy BMWs?
The more I see the closer we get when investors think leaks into the NYT and CNBC will save them.
Good luck-
@VII, even though you are a Euro-skeptic for the long run, you have to admit that in this manic depressive market we could be in for a bull rally from now on into the 6/29 summit announcements and press releases. Could be a strong finish to the quarter, if EU leaders, ECB presidents, bank CEO’s, etc all just say the reassuring things that investors want to hear.
Aren’t you the one who says don’t fight the tape?
For the record, I blew it by selling (a little) into yesterday’s selloff, not seeing this bounce back coming. Shoulda, coulda….
Spot on Larry. Yes I can see a nice ramp higher. I’ll leave it at that. There is a lot I can see happening. I’ m good at seeing a lot of this but the trick is…. Do my actions, not my thoughts or wants end up working.
It’s one thing for me to see a ramp into the quarter it’s another thing to make money and the real trick is locking that in.
Im always candid…. And I’m just not sure as a center I should be out shooting 3 point shots just to see if I can make them.
About Europe. Well I may set off a revolution in Paris. I just bought a vintage American flag t- shirt to wear on July 4th in
In Paris. Happy 4th to everyone…. What ever happens in Europe my prayers are with the people who are affected most by this. I don’t care if your bullish or bearish.. These are real people who need progress. That is where my anger comes. Not at u CHAD M. Sorry!
Europe is different than the U.S but we all want the same thing . To be happy and be able to provide for our loved ones. I want that for Europe as much as for my family.
Again. Sorry to anyone I was rude too. Europe frustrates me sometimes.
I disagree and went 100% long SDS on Friday as to me the balance of the comments coming out of the EU members point to even more resistance by Merkel than ever. Monti, Hollande and Rajoy look to be trying to back the Germans into a corner and I don’t think they are going to like the results. I may be wrong, but it also seems to me that all of the fixes wing bandied about are useless and imply a complete lack of understanding of the crisis by those in charge.
I have a fairly tight stop on SDS at 15.79, so we’ll see what happens. Good luck to all.
Sorry replied to the wrong post
@VII, when you and your family go on your European vacation this summer, try asking the proverbial man in the street (or woman) what they think are the odds of attaining a fiscal union. The people who live there, and the Europeans who comment on this site, might have a better sense than we Americans as to how this will play out.
For a fiscal union to work won’t all the governments of the EU need to be comfortable with a permanent state of internal transfers within the union from countries like Germany to countries like Spain? Which the Germans apparently are not OK with, ref. “If I am giving money to Spanish banks … I am the German chancellor but I cannot say what these banks can do,” she[Merkel] said. (http://www.ft.com/cms/s/0/579e2846-bc8d-11e1-a470-00144feabdc0.html).
And even if they take the baby step of all agreeing to the same fiscal policy and creating the ability to issue Eurobonds, doesn’t that just revert everyone to the mean borrowing rate? Or worse, German and other countries with good credit issue their own bonds, like our states do, to maintain their low interest rate, but the periphery issues Eurobonds effectively pooling the bad debt and ultimately not really doing any good… And so, without an internal transfer system setup the periphery will need to borrow more and more because they can’t hit their fiscal targets because of the cuts and limits that will be opposed on them.
I think an EU fiscal until would technically work and may be the only solution, the only problem is that you would need to get a whole lot of people who do not have a long history of liking each other to look at a chart similar to the one in the link below and not bat an eye… this is never a talking point in US political elections (at least not one anyone really cares about)… would that hold true in Europe?
http://www.economist.com/blogs/dailychart/2011/08/americas-fiscal-union
I wish the EU the best, but humans haven’t changed much over the last 100k years (despite the fancy words we’ve learned to tell ourselves we have) so I have a feeling the “us & them” paradigm will not be changing anytime soon. Until there is a traumatic unifying event, each EU country will be an “us” and the rest a “them”.
Totally agree with both BL AND VII and I hope VII DOES ask the man on the street in eurozone what he/she thinks.. and reports back.
Cullen, while I agree it SOUNDS positive, once again, the steps to actually achieve said goal remain very substantial. This reminds me of people that vow to go on a diet……..again and again and again. I’m not doubting their good intentions, just their ability to follow through.
?Where is the $130 billion coming from?
?Where is the forgiveness of debts that will allow the countries’ economies to flourish?
?Do you really think the German courts are going to be OK with all of this?
?endless other questions??
I don’t think i’m being pessimistic per se, just realistic. Eurozone is not the USA (OK, guess we can add that to the spain is not greece, greece is not ireland ad nauseum collection).
In light of the comments you post and the probable ensuing market moves, it will be very interesting to see how your algo reads this. I’m betting (tho’ i may never know) that your algo kicks you out in a couple of weeks.
I expect a rally for 1-2 weeks on “hopium”, and then, when the nitty gritty details start to get looked at, another downdraft, and will play accordingly..
rhp
I agree – given the recent history and the knowledge that anything concrete will involve treaty changes , parliamentary approvals across all countries, potential legal challenges etc…….and different governments in place , is the market prepared to live off dreams for the future until it happens.
I’m guessing not for long.
It seems only ECB action can buy them enough time to do all this and they seem to be pulling back now if anything . If they were going to reactivate the SMP then surely they’d have done so by now.
rhp, sorry, i wrote my post before reading yours, so it looks redundant. Agree with your thesis. The only thing – new rally, if any, might not last several weeks…..
So all the good news in the last 24 hours only give S&P up by 10? With yesterday’s sell off, and it jumped based on some rumors in the past 2 weeks, the market does not seem to do well. Maybe it is because it is Friday, we will see next week.
Why don’t you be predictive based on past performance….? After all, so many of you can predict the future………….
You asked: Why don’t you be predictive based on past performance….? Well, I think VII and many of the rest of us are saying that based on the past performance of the last several years, the Europeans keep trying to come up with a solution or a fiscal union, and so far they keep failing, for very human reasons that are easy to understand.
Also, based on my studies of history I have learned that necessity can be the mother of invention. So when the Euro crisis reaches a boiling point, then perhaps out of necessity some kind of fiscal union may come together. I am skeptical that it will happen within the next 6 to 12 months.
I am in total agreement that systemic change will not happen without crisis.
This may be true not just in Europe but in the US (on this ground, the hope that Obama’s election would herald ‘real change’ seemed premature at the time and more so, now) – and perhaps globally as well.
If the last true systemic crisis came to a head in the 1930′s, the subsequent US track record looks pretty good in retrospect. Unfortunately Europe demonstrated that sometimes the new must emerge from the ashes of the old – but its postwar recovery was perhaps even more miraculous.
But with increasingly complex systems, by the time the crisis becomes apparent enough to galvanize human invention, it may be very late in the game (why ‘climate change’ is potentially so dangerous). History also includes periods when the eventual recovery was slow and arduous.
Also, most tactical investors, myself included, know all too well that we cannot predict the future. However, that does not stop us from making an educated guess based on the data that we are aware of, and with a lot of help from Cullen at pragcap.
Re: CNBC quote … I’ll believe it when all 4 step out together and give a great big hug and say the same thing. Even some of those emotional Middle East peace talks of the distant past seemed so positive (including the group hugs!), but ended in failure.
Sorry, but it sounds like yet another “unproven”rumour to me. Of cause, 130b euros one-time injection in the economy sounds better than nothing, but where the money will come from? EU budget? No chance. Some new mechanism (given that ESM is not implemented yet)? No chance. Contributions from the budgets of big EU countires? Spain, perhaps? No chance. Germany? Well, Germany still has some “extra” money… But even so, would it give them to Spain/Italy to support “growth”? Would it be direct subsidy? Loan? Would it be really decisive if they do it on one-time basis?…..
You see, when we start musing upon all these details, the absurdity of the idea becomes too obvious. The union can not really refinance existing debt on normal terms! And talking about “stimulus”, they would need something close to US numbers – 10% of GDP deficit for a number of years (as it is not ended in the US yet). Can EU, as a whole, run such deficits? Their GDP is something close to 16T EUROS. Thus, it means 1.6T EUROS extra borrowing per year – remember nobody just prints money, we all “borrow”! Just be honest with yourself and acknowledge they can not do it.
So, no, no, no, there is no hope in the world yet. They still need to run through good old banking crisis with restructurings, equitisations, bankruptsies, and such in order to lauch a “stimulus” that may be successfull.
lol,
yeah, we’re on the same page! and, i didn’t say “several weeks” i said 1-2 weeks (for a rally). so, I’m thinking we even agree on that point as well.
OK, we’ve placed our bets (or I have anyway). Now, we see where the roulette wheel with the magnet underneath places the little ball with the iron core!
best
rhp
How is this different than the last 100 “now we’ll really fix the Euro, we promise!” comments from European pols? This crap is gettin’ really, really old.
Yeah, good news could shoot the market rocket to the moon. And bad news could blow it up on the pad and kill all the astronauts. I’ll sit it out. I’m not making a one-way market bet on any of it, thanks! I’d be a goofy goober if I did.
The rhetroric of the politicians here in Finland against a fiscal union has not cooled off one iota. All the parties accross the whole political spectrum oppose a tight fiscal cohesion. I just don’t see how they can back off without losing face big time. I guess their position reflects what “the proverbial man in the street” thinks about the issue i.e., why should a thrifty Finn pay for a profligate south European.
Nokia is firing 18k people, it’s a big firm, too big for a little country like Finland and it’s in a big crisis that’s just at the beginning and could end very bad. If there is one thing Finland does not need is a strong currency. I hope that sooner than later also the local politicians will understand there is just one boat, currently sinking by the way. And because I’ve a decent understanding of the local welfare, in case of a prolonged recession, the finland public finances will sink like a stone.
@alberto,
We are on the same page. In fact recently some prominant business leaders have questioned the viability of a prosperous Finland in a not-so-distant future.
I would also love to hear from other readers of TPC in Europe, spcially in Austria, the Netherlands, and Germany, about the political climate in their respective countries and how they see the chance of an eventual fiscal union. All I can say is that in Finland, I am yet to see a proponent of the cause, and therefore, I am not particularly sanguine about it.
What they literally said is that they have to come up with a clear vision and that they plan to have a plan. Sounds bullish to me.
How many false rumors have come from CNBC about Europe? The only source worth listening to is Germany. All others are spewing hopium and lies. A good read on this subject comes from Mark Grant. http://www.zerohedge.com/news/europe-1-2-3
Is fiscal union even working in the U.S.?
Cullen has written about how whereas the states in the Union need to balance their budgets, non-trivial amount of aid flows to the states from the Federal government by various means.
A lot of people in the Right Blogosphere are commenting on, no, even hoping that California, Illinois, and other states perceived as not adhering to Libertarian ideals “be allowed to go bankrupt” or “will inevitably go bankrupt.” There seems, in some quarters, a longing that some states go bankrupt as way of teaching people a lesson.
There are significant differences between the states in regulatory climate let alone compensation of public employees and payouts to individual aid recipients — Medicaid, unemployment, Food Stamps, etc.
With the burgeoning Tea Party Movement, is there some peril to the large Federal support for state budgets and hence risk to the fiscal union we have taken for granted?
I’ve heard all these tunes before. Here’s one more:
Debt is debt, it must be paid off eventually – fiscal union or not.
(Unless, of course, one is a money “issuer”, which means one can create something (i.e. money) out of nothing and nobody seems to care – as long as they get their share).
OH MY GOSH!!!!!!!
That’s why investors want a fiscal union with a central bank. Then the Eurozone won’t have to pay off their debt and the markets will soar. How realistic!!!!!
this article is a good read because it shows a different opinion on European woes
http://www.ft.com/intl/cms/s/0/a438a8a6-b8ab-11e1-a2d6-00144feabdc0.html#axzz1yVHmxrPW
Non-Europeans would benefit from reading about the Napoleonic Wars as a reminder of how bad things get over here sometimes. Integration may be the right answer economically but culturally it’s hard to see. A common market makes sense to most of us but one nation is too much for most. Summary from Wiki:
The Napoleonic Wars were a series of wars declared against Napoleon’s French Empire by opposing coalitions that ran from 1803 to 1815. As a continuation of the wars sparked by the French Revolution of 1789, they revolutionised European armies and played out on an unprecedented scale, mainly owing to the application of modern mass conscription. French power rose quickly as Napoleon’s armies conquered much of Europe but collapsed rapidly after France’s disastrous invasion of Russia in 1812. Napoleon’s empire ultimately suffered complete military defeat resulting in the restoration of the Bourbon monarchy in France.
Despite a final victory against Napoleon, five of seven coalitions saw defeat at the hands of France. France beat the first and second coalition during the French Revolutionary Wars, and defeated the third (Victory of Austerlitz), the fourth (Victory de Jena, Eylau, Friedland) and fifth coalition (Victory of Wagram) under the leadership of Napoleon. These great victories gave the French Army a sense of invulnerability, especially when they approached Moscow. But after the retreat from Russia, in spite of incomplete victories, France was beaten by the sixth coalition in Leipzig and the seventh coalition in Waterloo.
The wars resulted in the dissolution of the Holy Roman Empire and sowed the seeds of nascent nationalism in Germany and Italy that would lead to the two nations’ respective consolidations later in the century. Meanwhile, the global Spanish Empire began to unravel as French occupation of Spain weakened Spain’s hold over its colonies, providing an opening for nationalist revolutions in Spanish America. As a direct result of the Napoleonic wars, the British Empire became the foremost world power for the next century,[1] thus beginning Pax Britannica.
Nice historical reference – it relates to thoughts I’ve had about the relationships between ‘crisis’, ‘transformation’ and ‘systems’.
We tend to think of crisis as ‘abnormal’, but we might consider that the American and French revolutions marked a period of transformative crisis for the western world:
Then for continental Europe as a ‘system’, the outcome of the Napoleonic Wars was a turning back of the clock (orchestrated by Austria’s – and Kissinger’s role model – Count Metternich). This left root issues unresolved and simmering beneath the surface to re-emerge in revolutions in 1832 and 1848. With the latter, a united, democratic Germany seemed poised to emerge under a parliament in Frankfort (Metternich lost his nerve and bolted); but in the end, the forces of reaction got the lid back on. However, in consequence, forces that had been progressive became extremist (social reform to Bolshevism) and/or reactionary (nationalism to militarism/fascism). and Germany was finally united under the aegis of Prussia. With WWI, the lid finally blew (and the three main reactionary powers, the ruling houses of Austro-Hungary, Brandenburg-Prussia and Russia, were toast).
Partly as a consequence of it, after WWI, the crisis became truly global again (adding financial crisis/depression in the US and much of the rest, and rising militarism in Japan).
The outcome of revolution was arguably favorable for the US (which as a system, for a while operated relatively independently from the ‘Old World’), but even there, unresolved issues re-emerged in genuine crisis as Civil War, and to some extent, fed into what could be argued as another period of systemic crisis in the 60′s.
Granted, for the US, Europe and much of the rest of the world (ex the USSR), the period from 1980 or even 1950 on could be seen as basically stable – but the periods when issues that could force transformational change were either manifesting in acute crisis. or (perhaps more dangerously), festering unresolved and unaddressed, are pretty extensive.
Interesting perspective. Think the crowd moved on to debate the purpose of banks but worth returning to this important backdrop sometime.