The Compelling Story Behind Europe
As Intel co-founder Andy Grove wrote in his book Only
the Paranoid Survive, there are certain events which
result in a "strategic inflection point" after
which nothing is ever the same. While paranoia may be
an extreme response to an economic threat from Europe,
investors would be similarly misguided to ignore what
is happening there - and happening in a BIG way.
Yes, there are plenty of concerns about Europe’s current financial crisis which are elaborated upon below for the skeptics. One great question is whether the crisis is current or portends to an inevitable decline of the Euro and the European Union. Another is whether Europe, with it’s conflicted national identities can resolve the differences better than our politicians have been able to do with the extreme polarity between the governing parties.
Two books elaborated on the economic potential across the pond in new Europe. The first is “The United States of Europe” by Washington Post correspondent T.R. Reid. The other is “The European Dream” by Jeremy Rifkin. Both are illuminating and highlight many reasons for concern about our economic future and the perception of invincibility most Americans embrace. These books do not predict an end to America as a major player in the world economy nor do they suggest we will fall from our pedestal as did the Roman or British Empires of past. They do, however, suggest several reasons why the U.S. may have to share the economic stage with others and shed some of the "unilateral" attitude many around the globe have come to resent.
Europe - The Basics
The Europe Union (EU) now has 28 member nations with
a population base of 455 million and an $11 trillion
dollar economy. In other words, the EU has a larger
population and economy than the U.S. That, in and of
itself, is reason to pay attention. While Europe doesn't
represent a military threat, the next battle for world
domination may be fought on the economic and philosophical
battle field as well as the military one.
The U.S. dollar has hit historic lows relative to the value of the Europe's currency (the euro). This is a real concern as it
affects our purchasing power around the world. It also limits our ability to attract international investments in our economy as well as the loans we have relied upon to finance
our spiraling budget deficit - these loans have been in the form of foreign governments buying our U.S. Treasury bonds. It is amusing, in a disturbing way, that individuals like
Alan Greenspan and Henry Kissinger are both on record has having projected that the euro would never work. Apparently, they were wrong - enormously so.
collective power of the 28 member nation union, despite
the recent rejection of the European Constitution by
France and Holland, may be just the kind of "strategic
inflection point" Andy Grove wrote about in terms
of changing the dynamics of global economic parity.
While the EU doesn't have physical territories or the
ability to tax or police its citizenry, it does have
an executive and legislative form of government which
can override the laws of its member nations. The perceived
imperialistic and bullying attitude of unilateral U.S.
foreign policies has resulted in a large portion of
the population that consider themselves European more
than citizens of a particular country - and opposed
to U.S. policy regardless of the merits of such a policy.
And because the EU provides almost 3 times as much foreign
aid as the U.S. to world's poorest nations, they have
considerably more pull in the international community
and United Nations. More importantly, they are very willing
to let the U.S. spend money and resources policing the
world while they spend their money in other ways they
consider more important.
What Europe Has that the U.S. Doesn't
For starters, the EU and the U.S. define quality of life
differently. While gross domestic product (GDP) is
lower in the EU countries, many in the population work
less than 35 hours per week and take 10-12 weeks off
every year to visit with friends and family or to travel
and learn about the rest of the world through experience,
Economist Intelligence Unit recently conducted a "happiness" survey
comparing 111 countries for relative happiness and ranked
Ireland as number 1 (I know what you're thinking but
it's more than their whiskey). The U.S. ranked 13th.
Unlike many studies which base their results on whether
respondents say they are happy, the Economist Intelligence
Unit developed a complex formula to objectively rate
happiness. The components used to determine the ranking
were income, health, unemployment, political stability,
job security, gender equality and "freedom, family
and community life." Ireland won because, "although
rising incomes and expanded individual choices are highly
valued ... Ireland combines the most desirable elements
of the new (4th highest GDP per person, low unemployment,
political liberties) with the preservation of certain
cozy elements of the old such as stable family and community
life." While it's easy to dismiss such studies,
those that do so are often the same ones who rely on
similar rankings when selecting a toaster for the kitchen
or a college for their children.
Despite spending more on healthcare per person than
the EU, the U.S. has a higher infant mortality rate and
shorter life expectancy. Ironically, there are over 40
million Americans lacking health insurance coverage while
not one European fails to qualify for some form of healthcare
provided by the state. And while wages are typically
higher in Europe, companies have reduced costs in other
areas (like healthcare) which are paid for by the government.
Children in the EU are also better educated when compared
with the U.S. which ranks 9th in scientific literacy,
9th in reading and 13th in math.
And worse still, the U.S. ranks 22nd out of 23 among
the world's industrialized nations in terms of the percentage
of people living in poverty. Only Mexico rates worse.
Business and Investing
While Americans like to brag about productivity, many
believe it is due to wasteful or meaningless activity
like suburban sprawl, diet and celebrity crazes and
the fast food industry as well as the unending spending
on the military, law enforcement and healthcare. It
is worth noting that the U.S. has an ever increasing
prison population (requiring the building of more prisons
and the hiring of more guards and bureaucrats) while
the EU has much less crime, violent or otherwise.
For all the chest beating in America about economic
superiority, the EU has already surpassed the U.S. in
several industries including wireless technology, grid
computing and the insurance industry.
Risks from the Current European Crisis
As bad as the economy has been in the U.S., the smoldering global center of the economic crisis is Europe. Volatile continental markets and angry demonstrations from Athens to Madrid are manifestations of the desperate scramble by European politicians to contain the Euro-Zone debt crisis that threatens to unravel the single currency and destabilize the region. The European Union and the Euro Zone were supposed to bring about economic stability and remove traditional barriers to growth, such as tariffs and regulations. Instead it's become a selfish union in which flailing economies feed rising nationalism, angst over immigration and simmering distrust between rich and less affluent countries. Many of Europe’s problems have been exacerbated by the inability, or the unwillingness, of policymakers ... to address the debt issues.
While the crisis may seem to be Europe's problem, if it results in a breakup of the Euro Zone or even a growth-dampening series of costly bailouts, it will reverberate from Beijing to Boston and back. Europe is the largest trading partner of both the U.S. and China. It's home to one of the world's largest pools of wealthy consumers. If they stop buying our stuff, everyone suffers. Meanwhile, a dramatic depreciation of the Euro or the possible dissolution of the union would make nations from Asia to Latin America that hold the Euro as a reserve currency much weaker. Even the mere effort to contain the crisis with looser monetary policy on either side of the Atlantic creates a risk of inflation and hot money that could punish emerging markets.
The worries have now come to a head. Borrowing costs for Europe's weaker economies, like Greece, Ireland, Portugal, Spain and Italy, have skyrocketed as halfhearted measures to stabilize markets have made investors suddenly wary that the European center is not going to hold and that richer countries like Germany simply aren't committed to the monetary union.
It's a very different era than the historically exceptional period of rapid global growth from 1991 to 2008, the period in which the European Union, the Euro and the dream of greater European integration were born. The linchpin of this age of optimism was, of course, the U.S. It helped rebuild Europe after World War II and toppled its main ideological competitor, the Soviet Union. The dollar and U.S. government debt, backed by America's well-functioning democracy and strong growth prospects, remained the largest, most liquid and (seemingly) safest investments on the planet. It was in this environment, in which all boats were rising, that the Euro began to gain strength.
Needless to say, the global picture has changed. It is a measure not only of the long tail of America's special position in the global economy but also of just how bad things are in Europe and elsewhere that there hasn't been a rush out of U.S. Treasuries. Following the S&P downgrade, ascribed to our slower growth and debt-ceiling shenanigans, investors piled into Treasuries as the market tanked. China, the largest foreign holder of T-bills, issued a stern warning to the U.S. to "cure its addiction to debt." But central bankers from Beijing aren't breaking down doors in Frankfurt to convert their dollar holdings to Euros. The Euro is the only viable alternative to the dollar as a global reserve currency. The British pound is history, and emerging-market currencies are still too small, volatile and controlled. And while plenty of investors are fleeing into gold, the world gold market isn't big enough to accommodate serious dollar diversification without massive inflation in gold itself. Prices are already at record levels.
After all, the average Euro-Zone deficit is only 6% of GDP, compared with 10.6% in the U.S., and Europe's debt-to-GDP ratio, while similar to America's, isn't rising as fast. The difference is that the U.S. has time and favorable borrowing rates on its side; Europe has neither. Also, the U.S. can tackle its fiscal problems if it finds the will to rise above partisan politics; the politics of the E.U. — and in particular its lack of true political integration — makes it impossible for it to actually get to the root of the Euro crisis.
The result is a monetary union that can sometimes resemble a casino. The existence of a European Central Bank (ECB) means that countries like Greece, Belgium and Ireland are free to borrow from the credit window and take on more debt than they can handle. But the fact that there's no centralized political control or accountability means that more-prudent member countries like Germany have no way to stop weaker states from undermining the viability of their shared currency.
That's not so easy on a continent with a currency and a monetary system underpinned by multiple political systems, economies and fiscal priorities. Figuring out how to bail out the Euro Zone is a lot tougher than figuring out how to bail out the U.S. financial system, although throwing money at the problem is a certainty.
There is a way out. Germany, one of the strongest and most solvent economies not only in Europe but in the rich world, could swoop in and save the day by leading an effort to guarantee all Spanish and Italian debt as well as the debt of the major European banks. This would calm markets. But it would be hugely expensive, not to mention politically contentious. There is a way out. Germany, one of the strongest and most solvent economies not only in Europe but in the rich world, could swoop in and save the day by leading an effort to guarantee all Spanish and Italian debt as well as the debt of the major European banks. This would calm markets. But it would be hugely expensive, not to mention politically contentious.
Bailing out Europe would represent a huge economic and political cost. Assuming it became politically acceptable, Germany would need to be able to make sure that Portugal, Italy, Greece and Spain — and any other European "PIGS" — cleaned up their act. And that, in turn, would require a real political union in Europe, one in which Brussels, the Euro capital, and perhaps to a disproportionate extent Berlin had control of the purse strings and fiscal policies of the Euro Zone.
The turmoil is a portent for the U.S. We are ultimately facing the same problem as old Europe: how to grow amid a continuing downturn when the public sector can't or won't spend more to jump-start the economy. It's clear that we've still got a lot of work to do before that problem is solved.
It Ain't Over Until It's Over
As the famed New York Yankees catcher and manager Yogi
Berra used to say, "it ain't over until it's over." Or
as Abraham Lincoln was fond of saying, "keep your
friends close and your enemies closer." The U.S.
has been very close to their enemies (remember the "axis
of evil" philosophy and Iraq) but perhaps, and
only perhaps, it has taken its eye off the ball (or
one of the balls) by not keeping its EU friends close
The U.S. still reigns supreme and will likely, despite
the undeniable surge of competition from the EU, be a
significant player into the foreseeable future. Still,
it is worth paying attention to what is happening in
Europe and considering the investment possibilities there
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Charles M. Bloom, Registered Principal offers securities
and advisory services through Centaurus Financial, Inc. - Member FINRA and SIPC - 775 Avenida Pequena, CA, 93111 (mailing address: 3905 State Street Suite 7173, Santa Barbara, CA, 93105) - CA Life Insurance License No. 0A52786 - Centaurus Financial, Inc. and Shoreline Wealth & Investment Management are not affiliated companies.
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