Europe is in turmoil, and sooner or later the effects of the problems in Euro-land will be coming to the United States. Europe is one of our largest markets. Over the past several years, American goods have been selling at a 30 – 40% discount to European goods because of the dollar/euro exchange rate. Conversely, imported goods have been 30 – 40% more expensive...especially oil.
Several years ago the members of the European Union voted to adopt a common currency. Sounds like a good idea, but it had a tragic flaw. Although it has a central bank that determines monetary policy (how much money is printed and circulated), each country kept its own fiscal policy (how much they tax and spend). Each country had to meet certain fiscal standards to join in the common currency. Germany qualified. France sort of qualified. But the lower tier countries such as Spain, Italy, and Greece didn’t. So they entered into some creative financing with the European Central Bank and borrowed lots and lots of money…then cooked the books.
That would have been alright, but they continued to borrow money to pay for perks for their electorate. In Spain, you can retire at age 60. In Greece, you can retire at age 55. In Italy, sometimes you work, and sometimes you don’t. And in Ireland, the supposed European economic miracle, it borrowed to support a tech industry that was dated almost before it began. Bottom line, the countries can’t repay the debt. The result is a wide disparity in bond yields...which makes no sense at all.
Germany and France imposed strict conditions on bailout money for the lower tier countries, Germany in particular where you work to 65 and sometimes 67 with only limited time off. Why should Germans work and pay higher taxes so the Greeks can sit home drinking ouzo.
The Greek government imposed a radical austerity plan on it citizens, who in turn rioted in the streets. This past week, the Greeks voted these guys out of office and replaced them with a more extreme right wing regime including some neo-nazis. The goal is to lead Greece out of the Euro-zone and back to the drachmas. Currency devaluation, here we come.
The French, also suffering under austerity plans, booted out Nicholas Sarkozy and replaced him with an out and out socialist, who has a problem with people of finance. The wealthy French, who are headed to being taxed at 75%, are making plans to move across the channel to the United Kingdom.
The Germans also shifted to the left. Although Angela Merkel remains the head of the German Government, she has lost many seats in the German parliament.
All of this means that the chances of the Euro surviving as a currency are slim to none. The only way the lower tier European countries can save themselves is to devalue their currency...and they they can't use the Euro to do that. Europe is already back in recession, and as the currency crisis expands, it will sink even deeper. This will reduce American exports to Europe as the dollar strengthens, but should also have effect of reducing the cost of gas by 10 – 20%.
On the other hand, this shift to the left is an ominous sign for the United States. With 50% of the working population paying no federal income tax, and one in four Americans relying on some sort of federal income or assistance, the message of limited government with limited spending and limited taxes does not resonate. Why would these folks vote to upset the apple cart?
Margaret Thatcher’s warning about big government and socialism is now more important than ever: sooner or later you are going to run out of other’s people money. Sounds like a joke, but not really. The result will be the Weimer Republic in Germany in 1930. If you don’t know what that is…look it up. You should be concerned.
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