12/7/2011 3:41 PM ET|
Endgame is here for euro -- and us
Even if the euro is somehow salvaged, Europe's economic bloc is downward-bound. And with the world's finances now so intertwined, that fall will be also felt here and elsewhere.
If you're like most Americans, you're probably sick of hearing about the crisis in Europe. The bailouts. The political turmoil. The frantic meetings. The credit downgrades. And now there is talk of a deep new recession across the pond as the eurozone moves closer to splintering.
People want to hear instead about the issues that matter to them. What about the job market? Why are home prices falling again? Will Congress keep unemployment benefits and tax cuts going? And when, if ever, will I get a raise?
But here's the thing: Europe matters. And it doesn't matter just to us; it matters to the rest of the world, too. Reverberations are being felt everywhere. After all, the eurozone is the largest economic entity on Earth.
- Special report: MSN editors in Europe take a country-by-country look at the impact of the eurozone crisis
Europe is China's largest trading partner. With Europe heading into recession, the latest factory-activity report out of China pointed to the largest drop since the depths of the recession in early 2009.
Brazil, whose commodities fuel China's production lines, saw its economy grind to a halt in the third quarter -- a sharp retreat from the 7.5% annual growth seen last year.
Europe is also a major U.S. trading partner and the destination for some $240 billion in goods and services at a time when exporting is one of the few areas of strength. And more importantly, while the U.S. banking system has relatively little exposure to the debt of countries like Greece and Ireland, it maintains significant exposure to Europe's banks -- which in turn maintain huge exposures to those troubled countries.
With that in mind, here's why the eurozone's days are numbered, and why it matters to all of us:
Dead currency walking
A lot has happened since the eurozone debt crisis first ignited in the spring of 2010 (and since people first started worrying about government debt because of difficulties in Dubai in late 2009) -- far too much to review it all here.
But at the most fundamental level, the current crisis stems from structural problems in the currency union that led to excessive borrowing and a lack of economic reforms:
- A single, shared interest rate for both misers like Germany and spendthrifts like Greece.
- A lack of fiscal discipline and enforcement.
- The inability of the European Central Bank to regulate local banking standards.
(These problems were identified but ignored when the euro was born back in the early 1990s on Faustian hopes of a united Europe.)
As the situation snowballed on worsening budget balances in the "PIIGS" (Portugal, Ireland, Italy, Greece and Spain) countries and financial sector turbulence, Germany's prescription as Europe's creditor was straight out of the playbook responsible for the 1937 downturn that prolonged the Great Depression: tax hikes, spending cuts and deep fiscal austerity at a time of economic vulnerability.
Combined with ongoing joblessness and loss of wealth (Greece is entering its fourth calendar year of recession, while Spain's unemployment rate is approaching 23%), the pain caused by this approach has fueled violent protests and political instability. New governments have been installed across the PIIGS nations as voters rage against their leaders. Desperate to keep popular anger from derailing austerity efforts, unelected technocrats have taken power in Rome and Athens.
The situation has deteriorated relentlessly as politicians tiptoe around angry constituents and a bond market that is losing patience.
An agreement in July to expand Europe's bailout fund barely passed parliamentary votes in the 17 eurozone countries -- and a failure by the Slovakian government to placate nationalists nearly upended the process. An agreement in October -- to expand Europe's bailout fund with private funding and cut Greece's debt load by 50% via voluntary debt write-downs -- was undone by a move to put the plan to a popular vote in Greece and by the increasing inability of Europe to finance itself.
Now the endgame approaches.
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What's the big deal? European nation goes broke - who cares?? Oh it will hurt investor confidence Too bad - let them buy US Treasury 30 year notes at 1.1%. Good for us..
Oh it will hurt US Banks. Too bad, if the top 3 US banks failed, what makes you think 50 regional sized banks wouldn't spring up to take their place.
This is all about trying to protect the investor at the expense of the worker. Nobody's talking about writing down the debt for the consumer who is overextended - why because only the little guy gets hurt. Some big money investor about to lose 50M on Eurobonds and then we have a crisis.
F*k 'em. Let them all go bankrupt.
As long as the stock market and bond market is seen as a casino and people "play the market" with short term trading or computer trading rather than using stock as a means of capitalizing true production growth, we will have trouble. Trillions of dollars are made and lost with nothing produced and no one employed. Let's return to the tax code of the '50s and '60s (without the wars and the arms race) and see what can be done as workers are once more rewarded for labor and production is seen as a positive, not just maximizing personal wealth at the cost of everything else.
.....and we sit and watch what is happening in Europe from the US and have leadership in Washington trying to lead us down the same path that Europe is going down. The people in this country need to throw everyone in Washington out and start over including replacing the idiot in the White House.
so, it's the fault of the rich countries if the poor countries go bankrupt? ..nobody told the poor countries to spend beyond their means. if they caused the problems, let them suffer the pain. I don't see why america should be pulling these other countries out of trouble everytime they mess up. frankly, many if not most of them hate our guts.
honestly, where's the logic?
If it is "dooms day" for Europe, then there will eventually be another war over there. It looks rather like it did between WWI and WWII. Civil unrest, civil war, revolutionary war, etc., something will spark it. It only took an assassination of an Archduke to start WWI and economic collapse to start WWII...
Cheerful aren't I?
Europe has its own problems, but last time I checked as an American I don't ever really remeber recovering from the recession as things have been bad since Sept. 11 2001. And oh by the way, the exchange rate for the EURO is still higher than the US dollar at $1 USD=.75 cents EUR
Good Article Mr. Mirhaydari.
It’s rarely what you know that gets you in trouble; rather it’s what you don’t know. Most Americans are unaware of just how intensely Europe and the U.S. are intertwined.
Whether its beer, Anheuser-Busch InBev (Belgian) Budweiser. SAB Miller (British) Coors, Miller, one of the largest Coca-Cola bottlers. Or Automobiles, Fiat (Italy) owns Chrysler. Nestlé’s (Swiss) Ralston Purina, Stouffers, Carnation, tried to buy Hersey’s recently but the deal fell apart.
This are just a few of the former American business now in European hands.
What we don’t know is what the hedge funds with all of their credit–default swaps and the Fed and IMF have really been doing over the Euro crisis.
It use to be that when America caught a financial cold the whole world got sick ,now it’s when a little country like Greece gets sick the whole world gets deathly ill —Thanks Globalism.
Europe has its challenges, one of its biggest is their ability to unite. It is tough to unite when there are different cultures and languages.
However, I believe they see the advantages the USA has because we are united. With that said, it will be the USA that leads the world out of slow growth. It will begin with innovation, manufacturing, mining and farming. We just need certainty brought back to the market place and the money will flow.
Stay positivie and contribute where you can!
THE TRUTH IS NEVER TOLD....One of Italy's MAJOR banks would have defaulted if Muammar Gaddafi Libya had withdrawn Billions of Euros in several accounts at the Italian bank as he was in the process of doing... Italy's financial system would have collapsed bringing down France and also German banks and the collapse of the Euro and ECB and ultimately all of the central banks worldwide would be in danger of collapse. ..Solution - destroy Libya thru NATO with France leading the way...Problem solved no withdrawal of funds from Major bank in Italy. Libyan oil taken over by major western oil companies. Libyan Gold confiscated and a new western Central Bank established in Libya to control currency. Libya better off now? Look at the before war and after war pictures of Libya. Will the Moneychangers of the world ever be dealt with?? The only thing they cannot control is the 99% population of a country and they are very fearful of this segment and the voting booth...That is why they have inserted unselected Money Changers in Italy and Greece. LOVE OF MONEY IS TRULY THE ROOT OF ALL EVIL.
What happened to Anthony "Mr. Sunshine" Mirhaydari? A few weeks ago he was bullish on buying stocks; now he's admitting to just about everything about the euro zone that I predicted on here months ago.
In their anger and disgust, people keep voting for different people and then scratch their heads wondering why things don't change. The problem isn't so much the people we vote into office but rather the system. We keep sending different people into the same old broken system. It's the system that's broken. Until we change the system, things cannot change.
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