Like a spoiled child that can’t have his own way, Greece and its fiscal calamity have captured the attention of global markets because of the perceived systemic impact a Greek euro exit could have.
Greece may have an economy that’s only about the size of Delaware, but its likely default is testing the nerve of investors around the globe. An already heightened state of anxiety about future support for other troubled euro-based nations, such as Spain, is spreading wildly.
And aren’t those fears justified? As the current situation plays out, there’s only one winner: Germany.
Germany stands to benefit from record-low lending rates to its corporate clients. It will enjoy stronger exports for German goods. And it will dictate how tough love is applied to European Union member nations.
What’s interesting, though, is that in the formation of the eurozone and a single currency, one of the underlying goals was to regain the trust of European nations ravaged by German invasion and occupation during both World Wars. Of course, that point doesn’t get a lot of press, but it was one of the original tenets of Helmut Schmidt, Angela Merkel’s predecessor and political mentor.
Schmidt is the puppet master behind the “one Europe led by a benevolent Germany” model. And that’s why it’s a paramount goal of Merkel’s to diffuse the impression that Germany is the only winner by default of current circumstances, even if unintended. Otherwise, years of fence-mending will be torn apart like a wet paper bag.
Merkel definitely has her work cut out for her. Recent elections in France, Italy, Spain and the upcoming vote scheduled for June 17 in Greece to appoint new leadership squarely put Germany’s heavy-handed approach — which demands balanced budgets within a two-year time frame — at the risk of touching off further unrest and retaliation against all-or-nothing austerity.
There needs to be European Central Bank-sponsored growth tied to fiscal discipline in order to accomplish genuine economic recovery. Without real growth to offset widespread spending cuts, a deep and protracted recession in the eurozone is unavoidable.
The balancing act of curtailing public spending while infusing stimulus in the private sector rubs against the socialist model that permeates France, Spain, Italy, Portugal and Greece. But all parties are beginning to comprehend the severity of the fallout if capital flees the markets, which then would trigger a run on the major banks. That scenario isn’t out of the question if a decisive action plan isn’t enacted.
A Decisive Action Plan: Eurobonds
Here at home, the U.S. issues Treasury debt that represents all of the states and territories Washington governs. Although U.S. states operate separately and oversee independent state budgets, they’re bound to the federal government in countless ways, including taxes, military, law enforcement, transportation, education, parklands, energy and environment.
And now is the time for Europe to put a similar vehicle into action.
There’s an old proverb about how “my brother’s warts are my warts,” and if the eurozone model wants to win the test of viability, then this approach is the best option. At this point, the whole is greater than the sum of the parts. The refinancing of Europe should be all-inclusive, not only as a way to rekindle the spirit of the creation of the eurozone, but also to deliver on the promise of this regional endeavor to galvanize the continent as one for all and all for one.
To that end, the idea of a pan-eurobond now becomes more than just a concept. The issuance of a vast refinancing effort to the tune of $2 trillion euros, with a follow-on offering of another $1 trillion euros, provides, in my view, the solution that cauterizes the bleeding of fiscal sovereignty. And it would bring down the hammer on the negative psychological pit felt by European citizens and investors.
Think about how it feels to refinance your house from 7% to 4% in today’s mortgage market, assuming you qualify for the loan. Most borrowers would love the opportunity to drastically reduce their biggest monthly budget outlay. But to do so, you need a co-signer. Aside from the International Monetary Fund, Germany is the lender of last resort for Europe’s troubled nations if the intent is to maintain the eurozone in its present state. Germany would have to be the cornerstone guarantor of such a bond issue.
Of course, to achieve the kind of results that global equity markets can believe in, such a deal must be offset with mandatory balanced-budget amendments for all participants, or else Germany won’t go for it. And heavy monetary fines also should be applied for slippage in adhering to newly crafted terms of fiscal obedience.
Starting a New Day
But the silver bullet right here and now is to call in all high-yield sovereign debt and refinance the outstanding sums at today’s interest rates of 1.5% to 2.5% for AAA-rated government bonds. In doing so, billions of euros spent on interest expense are eliminated overnight — and a new day begins for the region.
By issuing a massive eurobond offering at, say, 2% with a triple-A rating, the euro currency can be devalued on an orchestrated basis by central banks to boost exports without pushing up interest rates. Keeping the euro artificially high is stifling exports, but at the same time, that action is being defended so that sovereign bond rates within weaker nations won’t spike to double digits.
The value of the euro needs to come down to spur export trade of the region’s goods and services, and to get GDP growth back above 3%. Because ultimately, Europe has to grow its way out of the mess it’s in — not just to create jobs, but also to generate enough tax revenue to pay down newly minted eurobonds.
The underpinning of this argument lies in a firm understanding by all member nations that they’re collectively sharing the pain for the long-term gain. Restoring growth comes at a price of widespread commitment and sacrifice in the form of a renewed work ethic and controlled government spending.
Rebuild Europe’s Backbone
This is the cold-shower treatment that many Europeans don’t want to accept, but the continent is fast approaching the fiscal point of no return. This option presents a wonderful opportunity for those countries to win back the rest of the Western world, which holds the jaded opinion that Europe has lost the backbone that once helped it cope with the crisis it faced through the 1940s. It is what it is.
If the effort is properly executed, several major positives will result:
- A widespread and mutual feeling of getting a fresh start is just what Europe needs to feel it has some breathing room.
- Germany comes out smelling like a rose in its role as primary backer, further vindicating that country from its sins of past wars.
- The socialist model so vilified by the rest of the hard-working free world gets a redo, characterized by higher retirement age levels, longer hourly work weeks and lower cost-of-living increases — without which there should be no deal.
For lack of a better metaphor, Europe needs to go through rehab. With a monumental collective refinancing project that encompasses and takes on the full scope of the sovereign debt crisis, our brothers and sisters across the pond can pull themselves out of what otherwise is a flat spin into insolvency and, ultimately, anarchy.
I firmly believe that after three years of patchwork fixes by the various measures employed, there’s no Plan B that will prevent failure and the eventual spread of systemic contagion. One hopes that Merkel, the leaders of all the EU nations and the ECB will take the extra steps necessary to take advantage of the once-in-a-lifetime opportunity of historically low interest rates to issue debt, get guarantees in writing from all parties and trust that the neighbors they want to embrace as one union seriously take them up on their offer.
The time for action on a Eurobond refinancing program is now.
Bryan Perry is the editor of Cash Machine, a weekly financial advisory service that focuses on high-yield investments that provide cash payments month after month—no matter what happens in the stock market and global economy. His brand-new report, 9 High-Yield Dividend Superstars Every Investor Must Own Now, details the biggest threats to your wealth today, as well as reveals four bulletproof sectors that will continue to outperform. To access your FREE copy, go here now.