Debt saga plays on
By Joel Dresang
News of a Greek bailout plan sent financial markets climbing at the end of October. Lenders in Europe agreed to accept half of what they’re owed from Greece, and bankers agreed with European Union leaders to set aside $1 trillion for a reserve fund against further troubles.
But euphoria was fleeting. Stock prices dropped within days as analysts scrutinized the proposal and the Greek government said it wanted citizens to vote on whether to accept further austerity.
The European sovereign debt crisis, led by Greece, has been messing with the global recovery and financial markets since early 2010. Any sign of progress is good news, said Bob Landaas, president of Landaas & Company, but he cautions that the Greek drama is far from over.
“They’re just kicking the can down the road. It’s wrong for investors to be thinking that the light has turned green, that everything’s fine and to get back in the water,” Bob said during a recent Money Talk podcast. “It’ll be years before they work out of the problems. The only way you ultimately help Europe is by allowing them to grow so that they have a better ability to pay you back.”
The initial response to the proposal was understandable, Steve Giles, vice president of Landaas & Company, said in the podcast.
“The talks in Europe are at least a step in the right direction. It’s not going to solve Europe’s problems, but at least they’re addressing them,” Steve said.
Bob agreed. “German Chancellor Angela Merkel was able to successfully negotiate with the bankers to take a haircut on Greek debt,” Bob said. “Second, they have that stability facility fund, for which they now promised each other they’re going to raise $1 trillion. What that does is backstops the banks. So, all that is good.”
But the structure of the European Union – 17 countries under one currency – poses other problems down the road, Bob said.
He cited work by Nobel laureate economist Robert Mundell suggesting that, ideally, each nation would have three wishes for world trade:
- free flow of capital
- control of their own monetary policy
- control of their currency
“History and experience show that every country can at best get two of those,” Bob said. “If you look at the United States, we control our monetary policy, and we can allow free flow of capital. But we don’t control our currency.”
Likewise, the global markets control the value of the euro, but member countries also have lost control of monetary policy through their participation in the European Union, Bob said.
“History and experience show at best you can get two out of those three. But in Europe, they’re only getting one out of three,” Bob said. “And the cracks are starting to form, and you see how impossible it’s going to be moving forward to have a unified monetary policy and still allow free flow of capital.”
With more stable countries getting tapped to bail out Greece and possibly other European Union members later, a wedge is forming, Bob said.
While sharing a common currency, the euro zone nations remain independent, Marc Amateis, vice president of Landaas & Company, said during the podcast.
“It’s a situation where you have different cultures, different work ethics, different things going on in these countries,” Marc said. “They can make all the agreements they want, but when it comes right down to it, it’s awfully hard for Germany to tell Greece how they need to live their lives. If they have different opinions on that, it’s a very difficult problem to have.”
When it comes to monetary policy, Bob said, countries like Germany fear inflation while Italy and Greece “don’t care about inflation at all, it seems, because they want to build their own economies.” Such differences, Bob said, will lead to an eventual unraveling of the euro zone.
“Ultimately, what’s going to happen is countries like France, like Germany, are going to say, ‘Adieu, auf Wiedersehen. We don’t want you in our group.’ And there’ll be a group of the haves and a group of the have-nots.”
The proposed bailout would buy Greece time to improve its debt situation to a projected 120% of gross domestic product by 2020, compared to an estimated 180% without the plan, Marc said.
Whether that happens is still playing out. The bottom line is that European debt will continue to distract and disrupt global markets for some time.
“It’ll require years of repatriation,” Bob said. “It’ll require years of putting your finger in the dike.”
Joel Dresang is vice president of communications at Landaas & Company.
initially posted Nov. 04, 2011