20th November 2011: Short, Medium and Long Term Solutions to the Euro-crisis

20^th November 2011: Short, Medium and Long Term Solutions to the Euro-crisis

Quote of the Day:

Gaining credibility is a long and laborious process… but losing credibility can happen quickly.

Mario Draghi – ECB President

Macro Overview

How to Solve the European Crisis: Short, Medium and Long Term Solutions

• Back to the economic problems at hand. To be honest not much has changed economically with the EU – perhaps that is why European indices are closing in on their lows of the year. In some cases (Italy, Greece) it’s a case of same problem, different personnel.
• I’ll suggest how the economic problems in the EU may be addressed. It may surprise you to note that I actually err in favor of a German-style solution (amendments to the Treaties) not a Fed-esque: “print first, ask questions later” approach. Never-the-less one cannot embrace a central bank structured to dance to the tune of a German economy without Germans taking some ownership of the fallout. Here, humbly, are my short, medium and long term solutions to the crisis and there is no order of priority here. Because the can cannot be kicked any further, it is just as imperative that we implement long term solutions immediately:
1. Short Term (to secure the days and weeks ahead) – unfortunately, either by flawless design or comical ineptitude, politicians have succeeded in procrastinating so long that the credibility of the ECB is already in freefall. The ECB now has little choice but to put its foot on the gas with respect to direct money printing/monetization of peripheral debt in order to avoid the falling chips of a collapsing financial system  dictating how Europe is finally structured. However, the ferocity of short term actions depend largely on how the medium and long term actions are implemented. However, much though I hate to say it, looking at the EU’s record thus far it’s likely that the only short term solution would be: ECB must print money (the French way).
2. Medium Term (to secure the months and quarters ahead) – No gimmicks or fancy tricks. The EFSF must be funded with real collateral, real capital and real commitment by the European core to a degree which puts the security of the financial system of the Eurozone beyond doubt. Notice, I did not use the word “cash” – Italy, France and Germany, for instance, have a lot of Gold reserves. It does mean, though, that tax-payers from the European core must put their hands in their pockets, metaphorically – there is simply no other way. So the medium term solution would be: front the capital for the EFSF (the financial way).
3. Long Term (to secure the years and generations ahead) – political structural reform with respect to the fabric of the European Union. Treaty changes and changes in legislation, strip it back and start again from first principles. So the long term solution would be: political reformation of the EU (the German way).

• It’s an interesting game of cat and mouse within the EU. The Germans have the economic power and therefore impose that they have the political power. The French have the political power and therefore impose that they have the economic power. You see, if the German’s could implement #3 immediately, there would be much less need for #1 and #2. But the more the process is delayed, the more the markets will enforce #1 upon them, irrespectively. As time goes on, the decision-tree sways toward the French side of the debate. Time is on France’s side of the debate, not Germany’s. One could almost say that this is a subtle game of brinkmanship, but it’s all very interesting, I have to say – who knows how this will turn out?

The UK Referendum Debate – Leaders Need to Lead

• So much talk about how “undemocratic” the EU has become, how sovereign states are sacrificing their sovereignty to an “elite” in Brussels (indeed within their own governments). How the political class have rebuked demands from their own people and endeavored to rape them, the people, of their democratic rights. Which begs the question: when should the government authoritatively govern and when should political power be abdicated by the minority that is government and released temporarily to the vast majority that is the electorate. These are the elastic boundaries of modern democracy and they are being tested today in Europe at full stretch.
• Remember The European Commission is the nuts and bolts of the EU – this is where legislation which directly affects Europeans is drafted. With responsibility for a $16Trillion economy and a population of 500 million people, it is perhaps astonishing that so much power has been granted to a European political body whose representatives are not directly voted for by the public. The European Parliament, of course, is a democratically established institution but its role is a little administrative, by comparison. The forefront of all government is expressed in the creeping political evolution through the constant creation of new legislation – but it is the European Commission which has this power not the European Parliament.
• If you are confused, then don’t worry, so are the half a billion Europeans in the Union – it’s not hard to see why many Europeans are skeptical of senior pro-Euro politicians (even within their own government, never mind other people’s governments) and just how much of their/our collective interests they truly have at heart. The reality is; many iconic and tectonic shifts in political landscapes happen in Brussels without democratic ratification that the public can truly relate to. The argument being that: political development is always with our “collective interest” at heart. But the politicians work for us: the onus is on them to convince us that this truly is the case and, if they cannot, then they must not do anything and leave the critical decisions to us.
• The UK referendum debate is just as interesting as the proposed vote itself. Indeed, it would appear the dissenting back-benchers emanating from all parties are pounding the table for a referendum in the UK. So this is not a partisan issue. Instead, the divide seems to have occured between those at the very top of government (perhaps the so-called “elite”) and those much closer to the electorate – what I would call “on-the-beat constituent representatives” and back-benchers, who seem to think the EU “decision” is so important to the future of Britain,  it should unquestionably be embodied in a much purer democratic process.
• Is this a good time for democratic purism? I don’t know. Is this a good  for political authoritativeness? I don’t know. What I do know is that the idea of membership of a European Monetary Union, indeed a European Union, has never had greater attention among everyday Europeans, including the British. We are at a cultural inflection point, the debate has never been so important, so poignant, so visible nor has so much ever been at stake.
• This is a definitive time for Europe and huge decisions are about to be made which will affect every one of its 850 million people – even those not in the EU. If Britain values its own self-interest, it must be a part of the decision-making process – even if it decides to exit the Union and the decision-making process altogether. If David Cameron and our senior politicians do not have the spine to make these massive decisions for Britain, then it is imperative that they should allow the public to do so for Britain.
• Skeptics would say that these are terrible times in Europe, but I’m more optimistic. With great turbulence comes great opportunity – these are exciting times in Europe, but we do need our leaders to lead.

Market Overview

“What Does This Button Do?” – The Last Words Said in European Parliament

• Poor Europeans, they try to come up with solutions but keep hitting the self-destruct button. If only Europe wasn’t so complicated. If only everyone had the same agenda, the same ideals, the same persuasion… but then it would not be European would it? Greek CDS rose again to new highs (see Chart of the Day)… so much for a new unified leadership.
• Same problems, different personnel.

Chart of the Day

Greek CDS (Source: Bloomberg)

Events

Macro Events:

Update:

• Nothing Significant

Alerts:

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Corporate Events:

Results:

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Dividends:

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Reading, Links:

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