by Jon Markman | September 19, 2011 11:17 am
Stocks tracked higher last week amid renewed optimism that Europe would avoid spiraling downward into a bottomless pit of despair after the leaders of Germany, France and Greece all pledged to pay their debts on time, support the euro and borrow more to pay for all the borrowing that they couldn’t pay for up until now.
No kidding — it gives you chills to think that they solved all their nagging problems with just a single phone conversation. Maybe next time they will work on world peace and a cure for cancer. What a clever solution: Pay for debt with more debt. It’s so impressive.
The week featured four straight sessions of gains, which was only the second time that had occurred since July 1. Each of the other two times led to 5% losses in the ensuing week.
The substance of investors’ joy in Europe was a little odd. German Chancellor Angela Merkel and a French presidential spokesman announced after a conference call with Greek Prime Minister George Papandreou that they had agreed to allow the European Financial Stability Facility to buy bonds on the secondary market to broaden its scope. A Greek government spokesman said Greece will meet all commitments to its partners to ensure full implementation of the program.
At face value, that sounds great. Yet no one has ever doubted the Greek people’s good intentions. The problem is that Greece is unlikely to be able to meet the demand of its German creditors and the wishes of its own people at the same time. They are incompatible.
As several analysts have pointed out, the productivity of the Greek economy at this point — amid a deep recession — is simply too meager to allow the Greek lifestyle to flourish unless it is heavily subsidized by the Germans.
Just to oversimplify (and be glib), this is the crux of the problem in Europe: It seems the Germans don’t believe they should work harder to pay taxes to support the Greeks — and who can blame them?
Meanwhile, a whiff of anger and guilt lingers over the two parties’ role in World War II. Some economists are even arguing that Germans didn’t fully pay war reparations at the conclusion of those hostilities, so perhaps this is the next generation’s payback time. It’s complicated.
A little further west on the continent, the Italian government passed a 54 billion euro emergency budget plan last week aimed at balancing its budget over the next two years and protect the country from a credit crisis. The plan cuts spending, raises taxes, reforms pensions and cuts aid to municipal governments.
Again, there are real doubts that Italy can satisfy both its own people’s needs and the demand of German creditors, but it has a much more robust economy than Greece and most likely can skate by for at least another year.
Taken a whole, however, we see that even more acutely than in the U.S., European policy makers are heavily focused on financing their debt by issuing more debt. This is no different than a cash-strapped family maxing out on new credit cards to pay for old credit card bills coming due. Unless growth really revives in a material way, generating oceans of new cash, all the bailouts are sunken money that will never be recovered. These debts won’t be repaid, and thus there is little hope for real financial stability in the region.
But Americans who live in glass houses should not throw stones. We do the same thing, but on such a vastly larger scale that the potential for ruin is too large to contemplate.
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