Europe

The eurozone’s economy is contracting as uncertainty over the viability of its currency is foremost on investors’ minds.  Politicians prefer to defer pain and they have implemented short-term fixes to keep the currency viable but have yet to address the structural weaknesses that created this mess.  European companies have committed significant resources to contingency planning should the currency go the way of the dodo. There is also a risk of bank runs that could add even more stress to the financial system.
 
I believe the most likely long-term outcome is increased federalization of the European banking system (which is a legal nightmare) and some manner of common area euro bonds (which means that Spain and Italy will be bailed out by Germany).  I don’t see Greece remaining in the euro. But I don’t know how the eurozone will disgorge them. According to the treaty that created the euro it’s meant to be the Hotel California of currency blocks… You can check in, but you can never leave.   
 
Spain is a much bigger deal than Greece.  It’s the European version of Florida.  Prior to the financial crisis in 2008-2009 Northern Europeans bought vacation homes and planned to retire in Spain.  This led to a housing boom and the subsequent mortgage crisis similar to what the United States has experienced only worse. Construction and real estate development were the main drivers of Spain’s economy. Its unemployment rate is 24% which is higher than Greece (21%).  Spanish banks are in big trouble with a ton of bad real estate loans on their books and their access to foreign liquidity is strained.  
 
The eurozone economy exports as much or more to emerging market economies than they do to U.S. consumers and Germany is the economic powerhouse of the continent. Most of the high-end factory equipment in Asia comes from Germany.  They’re basically China’s hardware store.  It’s not in Germany’s best interest to let the euro disintegrate and they’re going to engineer an outcome that keeps the boat afloat.

 

The euro has already fallen significantly relative to the dollar and it’s going to continue. I guess the silver lining in that cloud is that Audi automobiles and Italian vacations will be more affordable in the coming years.  Depreciating currency valuations are a stimulus to exporters but it’s going to be tough on the savings of European families.
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Filed under + Economics, Politics and Financial Planning

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