European melt down

FTLComm - Tisdale - Monday, May 17, 2010

The somewhat casual decline of the stock exchanges around the world though raising concerns among some economists has not really caught the wide attention of the main stream media or of the public at large. I do not suggest that alarms haven't been sounded or that the experts have not begun to attempt to explain the growing situation. It is just that the subtile fall in the DOW and the TSX have not moved this story to the CNN re-alert levels that see minute by minute headline disaster stories of what is happening.

However, the new media refers to this growing crisis as "contagion" because the nature of the problem is one that will spread once the awareness tipping points are reached. Here is what the world is facing. When the "made in America" banking collapse erupted there were financial institutions around the world that had unwisely invested in the US sub-prime housing market and they became immediately endangered. The realisation by the politicians was that if the banks began failing it could take years for the economy to right itself so it was decided in the United States and in the circle of G8 and G20 countries that the thing to do was pump huge amounts of public money into the economy first to save the intellectually challenged bankers and ultimately to prevent their economies from collapsing with the banks.

Now in some countries with resources and the ability to produce wealth from their assets the economic downturn of the early winter of 2008 was just a bump in the road. Canada, China and India took the problems in stride and all have made it through and are well on the way to recovery. But, those countries with marginal economies the situation is very different. The first country to go broke was Iceland and the second was Greece. The problem with Greece is it is a member of the European Union and uses the shared currency, the Euro. When it became clear that Greece could not meet its financial obligations the members of the European Union were concerned even a bit anxious but they did not react immediately they did not do so until Greece's crisis was beyond help.

The huge bail out that was engineered in Europe to fix up Greece's problems was to late and that is why last week and this we are see the jitters at the stock exchange.

In a very short while Portugal will be pretty much in the same situation as Greece not far behind it is the sagging economy of Spain and following that will be the economy of Italy. All of these countries have spent a far larger amount of money than their countries can sustain and with that condition they have kept their interest rates low, not increased their taxes and kept on spending money they were borrowing. All of these countries use the Euro as their currency and it is now in deep trouble. Only Germany and France have solid economies within the Euro based European Union and they alone cannot carry their neighbours.

The problem is far simpler than it is complex. Just like an individual a country can not borrow and spend without at some point paying back its debts or even managing those growing deficits. Britain has just had an election and its first order of business after forming its coalition government is to get out a budget. The people in the United Kingdom are being alerted to the spread of the "contagion" which after Italy is expected to hit Ireland and the UK next. It is hard to put a time line on the collapse of these countries finances but the Greek bail out looks like it failed and so will the other measures that will follow as Portugal, Spain and Italy all enter the same state of affairs.

The hard working Northern Europeans including Germany have a much more rigorous approach to finances. The Northern countries have industry, research and development on new industries and their workers are productive. But they can not carry the staggering load of debt that has been amassed. More over the Bank of England has let it be known that it believes even more drastic measures must be taken for the European Union to remain viable. The Bank of England is also pointing the finger are North America where the trouble began because the government of the United States though the largest in the world is only a fraction better off than Greece.

So, what will this financial trouble in Europe mean for us in Canada. If you don't have money already in the stock market don't start now because it is due to keep on going down and down. Our own government is going to raise interest rates a bit but for very different reasons. Our economy is heating up and inflation is a potential problem. If you have money you want to invest gold even at its dizzy height is still a good investment as it will keep on rising. Ultimately if the 'contagion" begins to affect the United States our economy is to closely tied to the American one and we are in for hard times.

The time line is still a problem. It is likely that the spread of government insolvency will run through the summer across Europe and hit the UK in September. Problems for the United States will be in in October and with the country all fired up for its non-presidential election in November. The crisis in the United States will be far more a state by state problem then a national problem as local areas in that country will take the beating the most. Here in Canada those parts of the country relying on export sales to the states will be hardest hit with unemployment climbing but staying well below these levels expected south of the border.

All in all 2010 is not looking good and a recession like this with governments being unable to meet their obligations will see wild swings in the value of the currencies of those countries. First under attack will be the Euro, then the English Pound then the US dollar. But before the US dollar comes under attack it will actually be riding very high as investors sell off their Euros to try and protect their capital. Through all of this it is hard to say what China will do because it holds such a vast amount of American debt.

To be continued. . .