The recent events in Europe have captured the attention of the world and taken the heat off of China and the value of its currency, the United States and the value of its currency, and financial reform in its various forms.
The focus, in my mind, is going to stay on Europe for a while because that is where the greatest amount of disruption to world financial markets and damage to world economic recovery can take place.
How long will this disruption and damage last?
I continue to recall a piece of advice given several years ago that has never let me down. The advice is this: If you say the problem is ‘out there’, that is the problem! That is, if you blame your problems on everyone else or everything else, your outward facing focus is the problem. Maybe you had better look at what you are doing before you start blaming someone else.
I have found this true in individuals, families, organizations, communities, businesses, and governments.
Right now, Europe is over-run with self-pity blaming speculators and the ‘irrationality’ of markets.
As a consequence, Europe has responded to the difficulties it faces with a grudging move to maintain the liquidity of its financial markets while preserving as much as it can the ‘integrity’ of its economic model. Its leaders are still trying to hold onto their model of the world.
Hence, the blame must be aimed at someone else!
And, that is precisely the problem.
The fundamental problem is that the economic model used by most of Europe is faulty and the current financial problem is one of solvency and not liquidity.
The three primary perpetrators of these fallacies are President Nicolas Sarkozy of France, Jean-Claude Trichet the head of the European Central Bank (French), and Dominique Strauss-Kahn the Managing Director of the International Monetary Fund (also French).
So far, these French leaders have been the winners of the political battles for the heart of the
European Union. So far, international financial markets have given these leaders at least a D- in terms of the plan they have devised to save union.
Where can we find this grade?
The value of the Euro has declined 18% from the middle of December 2009 to this morning.
The German Parliament has voted to support the current ‘bailout’ but throughout Germany discontent is rising concerning the leadership shown by the German Chancellor Angela Merkel. She, more than any other leader within the European Union, seems to be losing her clout.
Chancellor Merkel cannot afford to follow the French leadership.
Germany has established its position within the European Union through its strong economic growth fueled by a very robust export sector. It has also been fiscally prudent and plans to reduce its budget deficit to zero by 2016. The yield on German bonds attests to the belief the international investment community has in the intent and discipline inherent in Germany to sustain these outcomes.
It is these factors, carried over to the whole EU, that have benefitted other nations within the community to the extent that they could live beyond their means and feast off of their association with the Germans.
This, as we have seen, is an unsustainable relationship. Either Germany has to give in and accept fundamental reforms to the European Union that would seriously damage German competitiveness. Or, it has to maintain its discipline and continue to adhere to its fundamental world view.
There is no question as to what I think Germany should do!
Yet, if Germany continues to encourage its competitiveness in European and world markets and maintains its fiscal discipline, others within the European community will either have to emulate them or will have to remove themselves from this union. It seems as if we are at the juncture where there are no other choices. A wishy-washy response at this time will just postpone the outcome.
Of course, the critics of Germany see such a German policy as disastrous. Following the German model of reigning in wages and social benefits and achieving real control over fiscal budgets would result in further dislocation of economic resources in Europe accompanied by social and political upheaval.
The problem is that these other European nations have put themselves into a position where there are no ‘good’ solutions! Years-and-years of profligate living eventually lead to a situation where nothing they can do provides happy answers.
The only thing these loose-living nations can hope for is for time, cause “things will get better in the future!” Yeh, sure!
I don’t know how many times I have heard this response in business and elsewhere. “The market doesn’t understand us!” “All we need is some time and things will work themselves out!” “It’s just that there are some ‘greedy bastards’ out there that want to make money off of our misfortune!”
Europe, your economic model of the world doesn’t work! The only way you are going to really get out of this mess is to change your economic model. Deficits and a lack of social discipline don’t contribute to economic health. But, it is so much easier to blame someone else and following Germany would be a disaster.
There remains a lot to work out in Europe. These issues are not going to go away overnight. How long things remain unsettled there depends upon how quickly people realize that the problems are internal and not a result of “irrational markets” and the greed of speculators. It is very difficult, however, to realize that your model of the world requires modification. Perhaps such change is generational…but, can we wait that long?