The eurozone's economic union and banking system, a house built on pillars of sand -- that is, too much sovereign debt, reckless leverage and unmarked-to-market accounting by the banking industry -- are now in jeopardy.
Given the disparate economic, political and legal interests in the E.U., the regimes of some monarchs and prime ministers have been toppled, but the heavy policy lifting lies ahead.
The lesson learned in the American economic crisis and Great Decession of 2008-2009 and now in the eurozone crisis of 2011-???? is that debt cannot grow beyond the ability to service it.
A period of subpar economic growth is the best
. At worst, the European economies' downturn will be far deeper, bank credit will be restrained, the euro could vanish, currency and trade wars might erupt, and the European banking system could collapse -- or a combination of these factors could occur.
The only practical solution in Europe appears to be going the route of the U.S. and our
three years ago and embarking upon its own brand of massive European-style quantitative easing.
This weekend's edition of John Mauldin's "
" covers the problems and potential eurozone scenarios far better than I could summarize.
But the choice is print or let the euro perish. I see no other realistic solution, aside from massive austerity, willingly accepted by Europeans everywhere, along with the nationalization of their banks, etc., as described above. I think there is even less willingness to endure all that. It is a hard choice, I know. If you held a gun to my head and asked, "What do you think they will do?" I would have to say, "I think the ECB prints." But not without a lot of rancor and solemn pledges and maybe a rewriting of the treaty in order to get Germany to go along. The choice is between a much lower euro or one that is far different from today's, with a number of countries having left it. There are no good or easy choices. As a closing aside, a lower euro means lower U.S. and emerging-market exports (Europe is China's biggest customer!) to Europe and more competition from Europeans in what the rest of the world sells to each other. It will be the beginning of serious trade issues and when coupled with the collapse of the Japanese yen, circa 2013, will usher in currency wars and protectionism. This will be a decade we will be glad to leave in 2020.
report on Sunday underscored how volatile and uncertain the situation in Europe will be in the months ahead, as ECB governing council member Jens Weidmann said the bank's policy stance is "appropriate" after officials reduced interest rates. Weidmann said he's "confident that Italy will be able to deliver" on fiscal reforms and that the ECB won't aggressively buy peripheral debt (Italy and Spain) and increase the size of its balance sheet, as "fixing an interest rate for a country is certainly not compatible with our mandate ... you would guarantee a certain refinancing cost for a government and you could not argue that this was not monetary financing."
Even though headline inflation is subsiding, bank deleveraging and upcoming capital raises, when combined with a recession of unknown consequence in Europe, make it essential that the ECB both eases monetary policy and lifts its purchases of Italian and Spanish bonds, but an unrelenting, narrow and almost religious interpretation of its mandate risks more instability in that region.
Last week, I
that the U.S. stock market has become the best house in a bad (worldwide) neighborhood and that conditions have evolved over the past decade that have conspired to favor risk assets in the U.S. over many other areas of the world.
The recent travails of the eurozone (with Ireland, Italy, Spain and Greece on the economic precipice) confirm that my investment focus back to the U.S. is justified.
Doug Kass writes daily for
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Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.