In a recent research note Andrew Garthwaite of Credit Suisse discussed the two things that concern him most about the enduring crisis in Europe:

  • At which points do countries reach the breaking point in terms of the amount of austerity they can endure? Greek GDP has already declined 14% from peak and the Greek parliament is set to vote on the new round of austerity measures at the end of November (where legislation would implement the firing of 30K civil servants).
  • What will happen if the peripheral European countries keep missing their deficit targets? In the first half of the year, the Spain budget deficit was closer to 9% of GDP than the 6% of GDP targeted for the whole year partly, owing to the overspending by the 17 autonomous regions.
This is dead on.  The big risk (and likelihood) in Europe is that the “resolution” they are about to unveil will simply be some sort of enlarged version of the current plan.  That ultimately won’t fix the root of the problem as I’ve explained on several occasions.  The main issue here is that continued austerity that accompanies these new plans is actually causing the deficits to deteriorate.  The two risks above have the potential to blow the lid off this whole thing in the coming months as EMU leaders continue to misdiagnose and resolve the root of this issue which is the currency crisis….
Source: Credit Suisse

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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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  • Dr. Oliver Strebel

    Well, some here in Germany compare the current austerity policy with Brünings deflationary policy in 1931/32 to overcome the burden of WW1 reparations.

    IMHO Greece has swallowed enough austerity. More will just create an expensive desaster. But Greece has to make radical progress in taxing their criminal rich class. There considereable political pressure has to be set upon Greece and one will find a lot of Greece poeple as allies in this fight.

  • alex

    My prediction: The Greek citizens will overthrow their own government by Christmas, and its anybody’s guess what will happen then.

  • Martin

    Ah, the European issue of circularity…

    The D-process as per Ray Dalio playing out in Europe.

  • Scott

    If Germany is truly intent on saving the Union as Merkel claims, then the end game is ECB debt monetization in one form or another. The million dollar question then becomes “what will it take to get Germany (and the ECB) over the hump to take this route? I would like to hear what you think, Cullen, and anyone else who might have a good feel for the issue.

    My guess is that it takes:

    1) Crisis conditions where immediate drastic action is necessary to save the Union and Merkel can ram something through Parliament and the Bundesbank so quickly that hawks hardly realize what hit them.

    2) Vague promises from all EMU members that a genuine fiscal union will be formed in the future. This probably won’t really work out in the end, at least to Germany’s satisfaction, but it will be enough to provide political cover for Merkel when it counts.

  • Dr. Oliver Strebel

    Scott wrote: “If Germany is truly intent on saving the Union as Merkel claims, then the end game is ECB debt monetization in one form or another. what will it take to get Germany (and the ECB) over the hump to take this route?”

    IMHO, at least it needs a default of Italy. But even then the haircut on italian debt must be so large, that it would crash the financial system.

  • Different Chris


    “But Greece has to make radical progress in taxing their criminal rich class.” My understanding (which could be way off) is that is mor than just the rich class, that the tax system is as close to broken as you can get in Greece. That almost no one actually pays their taxes.

    I am of course basising almost all of my understanding on one Michael Lewis piece (haven’t read Boomerang yet but want to soon).


  • VRB II

    Let policy makers now reap the benefits of what they have sown.

    There are now several cans to kick and some r land mines …. This group doesn’t know which is the can and which is the land mine.

    Time is about up.

  • Dr. Oliver Strebel

    Well, I think the ordinary employee, which is the large majority, pays its tax, because its automatically withdrawn from the pay check. Aside from this, I think, only those, who want to pay tax, actually do pay tax. And of course not all of the small restaurant/hotel owners and taxi drivers are rich.

    In so far I should have phrased much more precise.

  • Pat

    As of July 2011, you could still get a 5-10% discount at most cafes and shops (my group had a hit rate around 50%) by not asking for a receipt. Dunno if that’s finally starting to change, but tax evasion is endemic to all social classes (as not all cafe/shop owners are wealthy)

  • pebird

    In order for Greece to actually accomplish a change in their tax collection processes and enforcement requires an investment, that is more spending. That may be going on (don’t have visibility into their budget detail). But running austerity at the same time they are trying to focus on implementing new taxation on a “criminal” class (which includes some non criminals) distracts the government from that goal.

    Austerity doesn’t work on a micro or macro level.

  • http://pragmaticcapitalism Michael Schofield

    I keep thinking the EU leaders are smarter than this. My thought is that they are doing their best to lead in the right direction. My fear is that they won’t get there fast enough. Short term they probably will do just enough to appease the markets, which are looking for an excuse to rally…

  • Martin

    “The issue is clear, youth unemployment is very high in peripheral countries in Europe. The danger being, the higher the rate of unemployment, the higher the risk for social unrest linked to the deterioration of Sovereign Credit, the slower the economic growth.”

  • Sostegno

    Na there have already been placed european special forces to prevent this.
    A military dictatorship is way more likely, claiming that it would defend anarchy.

    Like in Lybia, the rebels in fact are powerhungry monarchy fighters, they wove the monarchy flag, and the west is supporting them, claiming they would fight dictatorship, though Lybia is a direct democracy already, issuing interest free money.
    What they did first, was installing a new credit money issuing central bank in Lybia ( this way you can see that they are no freedom fighters at all: )

    Just wanna say based on that example, a change driven by the people in Greek is very unlikely, if you have all the western propaganda in mind on Lybia and what they are really doing there!

  • Nils

    I think even the City of Athens employed people off the books. Usually you have to work at full salary for a few years to get the maximum pension, then you can lower your official work hours and work the rest of the time for tax free cash. So you can for example have 20 hours on the books to get social security insurances and 20 hours for cash.

  • Nils

    The problem is, they are not. Just like US leaders they lack understanding of economics.

  • Dr. Oliver Strebel

    Pebird wrote: “a “criminal” class (which includes some non criminals)”

    Sure, as I said previously: I should have been phrasing much better.

    @Spending for a better tax system in Greece:

    The government apparatus in Greece is notoriously oversized. So a better taxation can IMHO to a large part be achieved by simply increasing the efficiency of the bureaucracy in Greece ;).

  • http://pragmaticcapitalism Michael Schofield

    Just trying to give them the bebefit of the doubt. The actions so far does give the appearance of someone who thinks the problem will somehow just go away if delayed long enough. Either way, it looks like trouble.

  • Different Chris

    I’ve thought the same thing at times. But damn if the Europeans aren’t the reigning kick-the-can champions. They have astounded me time and time again.

    I wish Mediocrates would pop in and comment on this. He seems to have a good handle on the Euro.

  • T. Reilly

    Just insert “EU” for “US” in the bailout headlines:

    On Sept 19 2008 (option expiration Friday) the market blasted off when everyone expected the US bailout. Come Monday Sept 22, 2008 reality set in and the bailout did not meet expectations. Stocks reversed course. Anyone see the parallels with today’s hype about the EU’s bailout on an option expiration friday. The VIX today is at the same level as it was on Sept 19, 2008

  • JWG

    [Repost] Every time I think the ECB will step in and do whatever it takes in terms of sovereign bond purchases to end the crisis, there is a rumor or leak that places the issue in serious doubt. I am beginning to think that this is all purely intentional; i.e., that the ECB gets the maximum impact for its limited sovereign bond purchases if the bond markets remain highly uncertain about when the ECB purchases will occur and in what amounts and durations. The ECB may simply be institutionally incapable of going all in to end the crisis.

    The biggest risk in Europe is that indefinite can kicking with targeted bond purchases under this approach might be the only alternative that is available to the EU. The EU social welfare state may have finally exceeded the productive capacity and borrowing capacity of the periphery. If the ECB refuses to be the lender/bond purchaser of last resort without limit in order to target rates in the Eurozone, the socioeconomic adjustments in Western Europe will reverberate throughout the world.

  • Andrew P

    The EZ doesn’t care about Greece. Greece will be thrown under the train and run over. The problem they have is how to firewall off Greece from the rest of them without violating any of the other numerous political constraints they are under.

  • Blobby

    Im going with the ECB as final stop. Of course nobody wants to go there immediately as thats not really the ideal situation. In effect greece is subject to fiscal union now. The other PIIGS also. I see the status quo continuing with lurches left and right with the ultimate ECB backstop in the background ready to pounce if needed.
    If France goes the ECB will have to step in.

  • VerySeriousSam

    To use the ECB and euro-bonds, and so the taxpayers of the eurozone, to further feed money via directly or via profligate countries to the finance industry is not at all a measure to end the crisis (which of the several ones, by the way?).

    Quite the contrary, it is a guarantee that the mountains of debt our children and grandchildren will inherit grow even higher, the income gaps widen even further, and the chance to find somesort of solution will become zero. At the end there will be war in Europe because the working class of the core countries who is robbed by other countries and the finance industry will elect leaders who promise them to stop this unjust transfer system to the rich and to the uncompetitive.

    Ah, BTW, there is no natural or man-made law that the standards of living in the eurozone countries are to be on the same level.

  • JWG

    Japan and the USA have decided to avoid painful socioeconomic adjustments through the use of keystroke money, courtesy of their central banks. Japan has a trade surplus and high domestic savings, which help it defer the pain. The USA’s trade deficits and low savings rate make it more dependent on its central bank for pain deferral. If the EU decides to take the pain of deleveraging and deflation rather than relying on the ECB’s balance sheet, its social welfare state will inevitably shrink as spending more closely aligns with national production and borrowing capacity no longer covers the differential. The EU’s mountain of debt may be leveled, but the process of leveling it will produce a much different world for our children and grandchildren.

  • Colin, S.Toe

    For over a century, the American South and Appalachia lagged other regions – as recently as the 70’s, parts resembled more a developing country. Yet the US functioned as a political and fiscal union. Since then, although pockets remain – and ones elsewhere have fallen – behind, these regions have progressed, arguably benefiting from that union.

    If Europe can overcome its current financial crisis and political disarray, is there any reason it could not function, with similar disparities, as a union?

  • JWG

    Appalachia and parts of the deep South were America’s poor cousins. They were related by deep cultural ties and a common language; you visit and exchange gifts on the holidays with your family and you do not let them starve. The Germans and the north do not think of the Greeks or Italians as their poor cousins. There is no common language or deep cultural tie. They are merely neighbors in a mercantilist condominium, and these neighbors are seen as lazy and irresponsible. It is not a question of starvation; it is a question of the lazy neighbors getting back to work. Subsidizing the early retirement of Greek hairdressers does not stir any moral empathy among the German population, and “save the Euro” stirs no passion. Is a currency union a matter of morality? I think not.

  • Colin, S.Toe

    In addition to current economic interdependence, it seems like a millenium and more of intertwined history, politics and culture might provide some ‘moral’ basis for unity. If not, it is a shame.

  • Colin, S.Toe

    On another aspect, this has not been and should not be a one-way street. The area north of here provided coal for America’s heavy industry, as it does now for power; my immediate area provided feldspar for myriad industrial products, mica, and now silica for computer chips, as well as timber. The oldest generation of Appalachian men show the health effects of a life time’s work in such extractive industries.