In my last post, I looked at some recent data examining the U.S.’s financial time bomb. Is Europe facing a similar financial time bomb or can we look to it for help, inspiration, and great economic ideas?
II. The European Financial Time Bomb
Returning to the U.S. Debt Clock (which I discussed in my previous post), you’ll see at the top left of the screen a link to “World Debt Clocks.” Click on that link and you’ll see a showing of the Public Debt to GDP and External Debt to GDP ratios. If you’ve been following the news about the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) you’ll appreciate what you see.
These countries are so awash with debt that they cannot dig themselves out. And France and Great Britain are joining the club too. Don’t look to Europe for solutions, they only have problems.
A lot of the European problems stems from the imposition of a single currency, the euro, on a congeries of countries with very different cultures, languages, and most importantly: different economic and social policies. The current crisis is so serious that the debate now centers on whether or not a Grexit − the exit of Greece from the Euro zone − will take place, and whether a Grexit will destroy the banking systems of the remaining Euro zone countries. Agustino Fontevecchia of Forbes reports:
How probable is a Grexit? 33%, according to S&P. Credit rating agency Standard & Poor’s assigned that probability to a Greek exit from the European Monetary Union after the June 17 elections. S&P believes that the possibility that Greece will renege on austerity and reform commitments has risen substantially as of late, which will shove it out of the EMU and into default again . . . The inter-connection between European banks is substantial . . . Italy’s UniCredit and France’s BNP Paribas, for example, are both sitting on more than $100 billion in European sovereign debt. Big American institutions like Citigroup and JPMorgan hold more than $10 billion in foreign sovereign debt on their balance sheets, while Morgan Stanley and Goldman each have over $5 billion. If a Grexit triggers a sustained rise in sovereign risk-premia, many of the world’s largest financial institutions will suffer the losses directly on their balance sheets.
And on the heels of talk of a Grexit is the developing Spanic − the flight of money out of economically unstable Spain. Here’s CNN’s Tim Luster’s report:
. . . Spaniards and Greeks are withdrawing billions of euros from their bank accounts and sending them somewhere “safer” . . . Such nervousness is understandable, as the Spanish government struggles to inject liquidity into the country’s fourth-largest bank − Bankia − and other financial institutions weighed down by bad property loans . . . Spanish officials say €50 billion (about $62 billion) may be required to keep the country’s banks afloat. Analysts at investment bank UBS believe the figure may be closer to €120 billion . . . Earlier this week, the Bank of Spain disclosed that the net outflow of capital in March was a record €66.2 billion, twice as much as the previous peak in December . . . The contagion has now spread to Cyprus, whose banks have made about €23 billion in loans to Greek individuals and companies. Last week, Cypriot President Demetris Christofias pointedly would not rule out the need for European support in rescuing banks with high exposure to Greece.
And with all this, the unemployment rates in Europe are shockingly high. Bloomberg’s Fergal O’Brien reports:
Euro-region unemployment rose to the highest in almost 15 years and manufacturing contracted for a ninth month, adding to signs the economy continues to weaken. The jobless rate in the 17-nation euro area increased to 10.9 percent in March from 10.8 percent in February, the European Union’s statistics office in Luxembourg said today. That’s the highest since April 1997, when the rate reached a record high . . . In the 27-nation European Union, the unemployment rate was 10.2 percent in March, unchanged from the previous month and up from 9.4 percent in March 2011. Spain had the region’s highest unemployment rate in March, at 24.1 percent, with Greece at 21.7 percent, the report showed.
In fact, things are so bad that some Portuguese leaders are telling their citizens to leave the country to find work elsewhere:
Now, laid low by recession, Portugal is telling citizens to head to former colonies where Portuguese is spoken, such as Brazil and Macau, to find work. “Recent graduates should lead a new type of emigration, different from the 1960s, when Europe was the destination,” Minister for Parliamentary Affairs Miguel Relvas said recently. “In the past 20 years, Portugal has invested in a generation of people, and now we can’t give them what they need: employment.”
And Richard Boudreaux of the Wall Street Journal’s MarketWatch reports:
Economic distress is driving tens of thousands of skilled professionals from Europe, and many are being lured to thriving former European colonies in Latin America and Africa, reversing well-worn migration patterns . . . The exodus is raising concern about a potential long-term cost of the economic crisis—a talent drain that could hinder the euro zone’s weakest economies as they struggle to climb out of recession. “This amounts to a hemorrhaging of highly educated people—the very people they’ll need if they are to take off when circumstances get better,” said Demetrios Papademetriou, president of the nonprofit Migration Policy Institute in Washington. The toll is mounting in Spain and Portugal, countries losing skilled workers to their former colonies. More people are emigrating from Spain, Portugal, Ireland, Slovenia and Cyprus than are moving to those countries, and in Greece officials worry that a similar trend is taking hold there. The European Union has no overall data on migration, but concern about the impact of severe budget cuts is growing in the U.K., France, Germany and Italy, all grappling with losses of top research talent.
As the old saying goes: The workers vote with their feet.
In sum, don’t look to Europe for solutions to America’s problems.
So what’s a poor boy to do? Clear out your own debt load with a bankruptcy, live within your means, and buy gold.