So far, 2011 has unfolded like a crash course in ancient history. First, the Mubarak Dynasty in Egypt fell, then the civilization of Greece collapsed. Now, the Huns from Germany threaten the Roman Empire.
Most analysts already have priced a collapse of Greek sovereign debt into the price of the euro and European stocks. But Greece is a relatively small economy. Italy is a different story. European banks are loaded with Italian debt, so European stock markets will remain very sensitive to the fate of Italy.
The good news is that, last week, German Chancellor Angela Merkel’s ruling coalition overwhelmingly voted in favor of a bill to boost the European Financial Stability Facility, effectively forestalling the sovereign debt crisis for now. At home, German aid to Greece is not politically popular, but the whole idea behind the creation of the euro in the 1990s came from Germany, which placed severe budget constraints on member nations. That means Germany will continue to help those countries that pledge austerity and discipline.
Germany’s hard line on Greek austerity is likely an object lesson to the larger euro zone laggards, such as Italy, Spain and even France. When I spoke at an institutional conference in Kansas City last week, I heard from a Putman bond expert, Michael Atkin, who said Germany is trying to get undisciplined countries in the euro zone to “feel the pain” so they will get their act together. He said Germany is trying to make Greece an example of what austerity looks like, so Spain and the other euro zone countries see the consequences of reckless spending and not follow Greece into the abyss of endless debt.
My own view is that China is the emerging economic powerhouse in the global economy, bringing all of Asia along in its wake. What happens in Europe has minimal impact on stronger economies like China. Therefore, it is time for Europe to wake up and realize that it no longer is the center of the universe.