A teacher once told me.
“Mr Berry, some people think you are an idiot, I suggest you don’t speak as this simply confirms it to the rest.”
Ignoring this sage advice I am under-noting some thoughts which I hope are not completely idiotic.
It has been fairly clear for some time that fundamentally the problem facing the West is that way too much debt existed and this has now to be reduced. This is a painful process involving huge sums being written off and resultant stresses to the system (individuals, banks and now Countries).
The US has been the quickest to react, housing falling by up to 50%, banks being recapitalised and corporations hoarding cash on their balance sheets. The US Government debt levels were already eye wateringly high prior to the debt crunch and the focus now on debt reduction is a positive; to cut benefits or increase taxes are politically very ”hard yards” but it’s front and centre now as the political battleground for the Presidential elections of 2012.
Europe’s issues are quantumly more difficult to resolve due to the construction and constitution of the Union.
The problems are by now well defined, multiple Countries pursuing multiple agendas with widely diverged economic and political imperatives.
As written previously the key player in Europe is Germany and it is becoming clearer what they are intent on achieving.
The markets (as is their habit) have been reactive and noisy both in the identification of the issues and their demands for a quick solution.
Germany is not (unlike the US) hyper sensitive to market noise and has decided to play the long game for some of the reasons outlined below:
- It is clear the European Union doesn’t work as it is currently constructed
- Their aim is not for a quick fix to the current funding issues, they know that this would be papering over the cracks which in time will simply reappear
- If they agree to a bailout prior to structural changes being agreed this will vastly reduce the motivation for such change
So Germany is repeatedly saying NO, we (Europe) need constitutional change first – only this will allow for proper monitoring and prevent Countries running up the deficits again. Only when these are robustly in place will we agree to collective “Eurobonds” i.e. they will only put their balance sheet on the line when they have comfort that there is control of the rest of Europe’s financial behaviour.
They are right to want structural change first; the market pressure is the catalyst for this change. It will ultimately create a better more robust system but it’s going to be uncomfortable and protracted journey.
NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.