Talk is cheap. And not terribly effective, even when it’s coming out of the mouths of Europe’s financial leaders, in ending a financial crisis like the one that continues to engulf Europe this morning (February 8).
The current phase of the crisis started in Greece, when the Greek government finally admitted that its budget figures were a fiction and the budget deficit would be a huge 12.7% of GDP. Traders and investors have sold Greek bonds and stocks ever since.
As of noon today in London the prices of Greek bonds were down again with the yield on the two-year Greek government bond rising to 6.61%. (For comparison, the yield on the two-year German government bond is just below 1% and the yield on the two-year U.S. Treasury note is 0.77 %.)
Greek stocks haven’t fared any better. National Bank of Greece and EFG Eurobank Ergasias, the country’s two biggest banks, were down 4% this morning.
Over the weekend, European financial officials talked tough about the crisis. “The European members of the G-7 will make sure it is managed,” French Finance Minister Christine Lagarde said on Saturday, February 6, after a meeting of Group of 7 financial ministers and central bankers in Canada. The European Central Bank is “confident” that Greece will cut its deficit to the 3% European Union limit by 2012, said European Central Bank President Jean-Claude Trichet.
Even U.S. Treasury Secretary Timothy Geithner weighed in. “I just want to underscore they made it clear to us, they the European authorities, that they will manage this with great care,” he told reporters.
Trouble is that everyone knows that there’s not much backing up the rhetoric.
The rules of the European monetary union are very clear on the standards that members are supposed to meet—a budget deficit of no more than 3% of GDP, for example—but the agreement doesn’t lay out any credible enforcement mechanism. What happens, investors and traders want to know if Greece can’t or won’t live up to its promises of fiscal austerity?
That’s a live question because there’s a good chance that the Greek government won’t be able to deliver. Polls show that most Greeks oppose the government’s plans to increase the retirement age and raise fuel taxes to reduce the budget gap. Teachers, hospital workers, and tax collectors, all facing possible job and wage cuts, have called a 24-hour strike for February 10. Workers in the private sector plan to follow about two weeks later.
And if the government caves in to political pressure and doesn’t deliver?
The measures open to European Union financial officials are extremely limited. There aren’t any sanctions that can be imposed to force Greek politicians into fiscal responsibility. Union rules prohibit bailing out a member.
That leaves the option of an end run around the system with a bailout financed by, say, Germany and France, being laundered through the International Monetary Fund, or leaving the solution up to the bond market and hoping that the private financial markets can force Greek politicians into taking measures that most Greeks oppose.
The problem with either of those alternatives is that Spain, Portugal, Italy, and maybe Belgium (according to the panic du jour) stand on the edge of their own fiscal crises. Bailout Greece and why not a much bigger Spain? Abandon Greece to the mercies of the bond market and prepare for carnage in Portugal’s debt markets.
There’s no easy solution and the crisis, rather than abating, still looks to be spreading to other countries in Europe. So far, in my opinion, the problems are large enough to rattle global financial markets but not contagious enough to pose a real threat to the system.
So far.
vuakko,
Another point to consider, it’s not just Greece, but Spain, Portugal, Italy, Ireland(maybe), Belguim(maybe), Eastern Europe(?)…. there doesn’t seem to be too many countries in the EU holding up so well under a mountain of debt.
vuakko,
Obviously, the Europeans recognize the truths you pointed out, specifically that Greece is not that big a part of the overall European economy.
Mind you, that doesn’t mean anyone should run out and buy European stocks. Even the Europeans aren’t running up their own markets. They recognize there’s a problem too. It’s only a question of how big is it, and how they plan to fix it.
EdMcGon: Now why are Europeans buying? Perhaps because they as closer to the action realize that trouble in Greece that makes up less than 2 % of EU’s GDP doesn’t really mean anything to the well-managed economies in Europe. Furthermore everyone in Europe has known the terrible state of Greece for a decade and more. (You don’t know even half of it…).
Now let’s compare this to something else: California, making up over 13 % of the US GDP is in a very serious budget crisis, their coffin is really empty. Just logically thinking, why isn’t this a much larger worry than the Greek situation?
All the countries of South Europe have fiscal problems of some sort, but this I knew in elementary school already. Ireland instead has only temporary problems, its economy is so dynamic (more free than e.g. US).
But why is there no more publicity on the UK? They’re already in trouble and the big boost coming out of the North Sea oil fields will disappear in the near future.
Increasing taxes will be a drop in the bucket considering our level of debt and entitlement budget stress. It will be done, but really its just a distraction to taking care of the problem.
And make no mistake about it, both high payments for interest on our debt and higher taxes will result in diminished economic growth. And thus the chances of growing out of the problem becomes even more remote.
Jim,
Any thoughts on the palladium ETF (symbol: PALL)? With it’s industrial application (mostly automotive), I like it better than gold.
Christopher,
Let’s face it. Countries have a longer life span than human beings. In the long run they could actually do it.
mopama,
It is really hard think increased GDP is going to save any “developed” county, and might even be hard for the emerging markets. After all if you borrow at over 12% of GDP that is a really hard mark for any country to meet, let alone countries that now can’t figure out how to grow at more then a couple or percent.
As far as I can tell, for the most part the hens(politicians) and the foxes (rich) are the same at least by the time you get to the congress level. So you are not only asking the politicians to put themselves out of jobs, you are asking them to tax themselves in the process.
Almost everyone in this world asks what is in it for me? And then doing what is really needed second. Actually it is probably not second, because there is “What will it do for my friends?”, then what it will do to my local community, ….
This is not just politicians, and they seem to represent “most” people quite well. And “people” seem to think going after the RICH is going to save them, but it isn’t for many reasons.
Frankly I don’t think most people even understand how human nature works. People worry about Social Security “going away”, but the truth is that given the amount of people dependent on it, only a total collapse will do that, instead what is really going to happen is they will get the same amount that was promised, but it will pay for half the food.
So with Greece and the the US for that matter I think you should be looking for inflation in the long term, not governments doing the right thing and controlling their debt.
There is one more thing that can be done: Increase GDP. IMHO there is a Titans (pun intended) battle going on at the moment. Finance people are resisting political rules and are returning the hot potato saying politicians first: they need to give the example of finance discipline. How about that?
doydum,
The only problem with that suggestion is you’re asking the hens (politicians) to go after the foxes (the rich). Just like in the U.S., until we get campaign finance reform, taxing the rich won’t happen.
There are 2 things in Greece (and the USA) that can be done:
1. Cut health care, social security, wellfare spending which means the non-rich, epecially the poor, will get hit.
2. Increase taxes. The rich have a millions ways to ditch taxes whereas the non-rich pays payroll taxes which means the non-rich will get hit.
Ditching taxes is so wide spread in Greece that creditors don’t believe Greek government promise of tax increase will be enough. They want the government to go after entitlements and they want IMF to administer the cutting measures, not even the EU. Tax evasion is rampant even in serious countries like Germany.
Make the rich pay the taxes they owe before going after people’s food and medicine.
The answer is simple. Eventually they will bail them out by printing more money. GLD looks good to me.
>Maybe we deserve the politicians that we put in office.
YX – Yes, we ALWAYS deserve the politicians we put in office. If one is not paying attention, then one gets what one deserves. Makes one pay attention the next time…
Any G7 or G7+1 or whatever meeting has become a totally useless, waste of tax payers’ money, photo opps for politicians of these countries. It’s time to tell these politicians enough is enough. Like this latest G7 meeting, the market would have felt better if they had never met at all. They met and came out saying don’t know what to do, it’s even worse!
Maybe we deserve the politicians that we put in office.
When its our time to deal with high debt (like yesterday), how will we react? The measures to cut spending on things like elderly health care (the biggest single budget problem), government worker wages, raising the retirement age, and decreased military expenditure, are political suicide. Yet if we don’t deal with the issue, eventually the pain will be much worse. Hold on to your hat.
mbakron,
The ONLY thing that would light a fire under the Greek people is total economic collapse. As long as they have their benefits and their inflated wage jobs, they don’t care. As for the Greek politicians, as long as they have their jobs, they don’t care either.
Mind you, this comment is not intended as a slap against Greeks alone. The people and politicians in the U.S. are the same way.
Why doesn’t the European Union simply say, “If you don’t follow the rules, you’re out of the union”? That seems kind of extreme, but it would sure light a fire under some greek politicians’ rear ends. Then the people of Greece might decide that fiscal responsibility is an important job for their politicians instead of striking.
One interesting piece I saw on CNBC on Friday noted how the European stocks have been taking a dive everyday around 11:30 am EST, about the time the European markets close. In other words, the only ones buying European stocks at the moment are the Europeans themselves.