European Crisis

October 6^th, in President Obama’s speech, he said - In regard to the world crisis, everyone has gotten cautious in their spending. America has over the last 20 years been the engine to economic growth. We were the purchasers of last resort and when the Europeans got in trouble they could always sell to the US. Because of our problems, Europe can’t export its way out of its problem so they need to find another way. The President said he promotes a more balanced economic growth world-wide. We can’t just buy, we also need to export. 

Athens, Greece had riots over budget cuts and increased taxes. Much of Greece’s debt is financed by 3 major French banks that spread the risk to US financial institutions by selling insurance for billions of dollars (this is part of our connection to other countries). Greece started a snowball effect in Europe. Five banks from around the world, including our Federal Reserve, pumped money into European banks in hopes of calming global fears; soon after Eurozone added $1.39 trillion in funds. On October 27^th, European leaders came up with a plan to end Greece’s crisis by writing off 50% of Greece’s debt. As a result of the European’s action US stocks rose 339.51 points but this was immediately undone by the Greek Prime Minister (PM) saying he wanted the Greek people to vote on the bailout and US stocks dropped snapping a 5 week winning streak. Initially, Slovakia blocked the expansion of the Euro bailout and Standard & Poor (downgraded the US) began lowering the ratings for several countries; causing problems for many (Portugal and Ireland are seeking bailouts). The European Union (EU) used almost $8 million to bail out a large Irish insurance company and the owner has since filed for bankruptcy for $2.8 million in personal loans to Ireland’s biggest bank. On November 4, 2011 the Greek PM dropped his plan to have people vote on bailout. The Greek parliament questioned his confidence level and although he survived the vote he decided to step down; a new PM was appointed on November 10^th.  

The United Kingdom a couple of years ago implemented an austerity plan that progressively increases taxes and cuts benefits. When they increased college tuition costs (with the increase they’re far below US costs), the British protested. France in helping Greece will probably have to implement a plan like the United Kingdom’s in order to save itself. On November 7^th, we find out that Italy’s government bonds sky rocketed sending their economy into crisis and the US Dow made its largest drop in 7 weeks (3.2%). Let’s talk about the Italian people. They’re forbidden to work more than 48 hours a week, are entitled to 4 – 6 weeks paid vacation, take 6 months for maternity leave and retire with a full state pension after 35 years on the job or at age 56 (non state workers retire at 65). Italy is one of the world’s 10 largest economies (Greece is not). Italy sees $2 trillion in economic activity (Greece - $305 billion) and is the 3^rd biggest bond market in the world. European investors will most likely come to US Banks which will drive interest rates lower. With the world economy shaking our banks won’t want to take any risks and it’ll be harder to get a loan. With the ups and downs in Europe, our market reacts; the average 401K lost $4000 in one day. On November 10^th, it was reported that Italy is $2.5 trillion in debt and will need to borrow $408 billion to pay the interest on its debt and keep the country afloat (they’re looking at allowing advertising on national monuments). Italy’s PM will step down on the condition that Italy agrees with the European demands for more austerity. Former EU commissioner Mario Monti is likely to replace him and he has been working on a plan for 4 months. On November 10^th, following intervention by the European Central Bank, Italy’s bonds lowered. In light of Europe’s progress and an unexpected drop in US unemployment claims, US stocks go up again; after the rollercoaster ride, the November 11^th rally put the market up 1.4% for the week. It’s being said that when Greece shook we felt tremors but if Italy falls it’ll be seismic as Italy is too big for a bailout. Italy’s austerity plan includes increasing the retirement age, privatizing state-owned companies, sale of state-owned properties, liberalization of certain professions and investment in infrastructure. On November 11^th, Italy’s PM stepped down after Parliament voted to initiate a tough austerity plan; Italians celebrated the end of Berlusconi’s reign.

It’s no wonder that Europeans are generally happier than Americans; they work less, retire earlier and their retirement is more than some of our people’s working wage. I was ready to be upset with the European governments’ austerity plans until I learned that along with better benefits most European countries have a lower percentage of people living in poverty than the US. I now know that for years the European governments gave generously to the people and now they want to take it back. I’m not agreeing with their approach but I don’t think it’s fair that others continue to suffer because of their lackadaisical (relaxed) lifestyles.   

Let’s hope the European crisis is over. Jonathan Swift said that – All government without the consent of the governed is the very definition of slavery. I know governments can’t please everyone so they’ll never get total consent but they need to start targeting the rich minority and close the gap between the rich and the not so well off. On November 9^th it was reported that 61% of Americans felt this way and I’d bet the Europeans do too.