Wednesday, May 5, 2010

Greece, Grease, and Wazzup wit U-Rup?

There is a lot of macro going on right now but much of it is being pushed below the surface by car bombs, Ahmadinejad’s nomination for the Nobel Peace Prize (just kidding), Steve Hogan’s win in the Bloomington primary, and Greece. So I thought it might be a nice time to take a step back and talk about Greece and Europe. Most of us Americans know that Grease was a cool musical with John Travolta and Olivia Newton-John. We also know cool stuff like who sang Under the Board Walk, who won the Kentucky Derby, why the Dodgers left Brooklyn, and how many Mannings play quarterback in the NFL. We Americans know a lot of cool stuff.

When I was growing up in Miami, Europe was a continent and a place that had a lot of World Wars. I heard it had a lot of cathedrals but none of that was ever much of a draw for me until my dear friend and mentor Chuck Bonser invited me to join him on a program in Europe. I think I went three times – two weeks each time – and I heard lectures by Europeans about Europe in places like Paris, Brussels, and Berlin. What a lucky duck! I am not an expert on Europe but I do know enough to try to add a little perspective to what is going on there and why it is such a big mess.

What we call the European Union or EU started shortly after World War II mostly because Germany and France decided that if they created more economic trade (iron and steel) between their two countries they might not want to kill each other so often. Before you know it they added Belgium, the Netherlands and Luxembourg and created a union of five countries. I suspect these three additions had less to do with coal and steel and more to do with really good beer. Anyway, I digress. From there we see an expansion from five countries to 27 and some 450 million people. Sixteen of those countries decided to drop their own currencies and adopted the euro when the Maastricht Treaty was signed. Since 1999 we began thinking of the euro as Europe’s currency despite the fact that many European countries are not part of the Euro-Zone and still have their own currency (E.g. Britain).

Enough history. Now some facts and wild guesses. First, despite the EU and the Euro-Zone, the countries of Europe are NOT like states in the US. They remain independent countries ruled by their own governments. They have made scores of agreements with each other that help facilitate European-wide trade and monetary union. These agreements bring wealth and prosperity to the people of the EU. They have great value and will not be reneged easily.

Second, it somehow APPEARS to some of us that there is more union than there really is. For example, the EU has government institutions that sound a lot like a federal government. There is an Economic Commission and an Economic Parliament. There is also a recent agreement that looks a lot like a Constitution. There is a new EU President and someone who acts a lot like a Secretary of State. Sounds like a country to me.

Third, appearances can be misleading. For example and relevant to 2010 and Greece (but not to Grease or the Drifters) is that while those in the Euro-Zone agreed to give up their currencies and let the European Central Bank determine their joint monetary policies – they did not give up their FISCAL POLICIES – that determine government spending and taxation. All 16 Euro-Zone countries have their own government spending and tax policies. For the sake of the monetary union they did agree to some constraints – to keep their fiscal deficits at no more than 3% of GDP and national debt at no more than 60% of GDP.

So when Greece (and Spain, Portugal, Ireland, and others) were found to be exceeding these fiscal limits, the rules required that these countries grapple alone with their fiscal problems, subject to fines if they habitually exceed the fiscal limits. Despite all the agreements within the EU and the Euro-Zone, there is no agreement that provides a European solution for countries that have debt problems. Germany’s original response was something like – let them charge higher taxes on gyros. Good German citizens are not going to bail out Greeks who spend so much time at the beach. Strange thing happened then – their shared currency, the euro, started to depreciate as if all those 16 countries were scofflaws.

Accordingly, the Germans and the French and the rest of the countries felt compelled to act. Only problem is that there is no legal EU means to do so. So now they are being more flexible and more innovative. Only trouble is that they are not yet being very convincing despite the fact that the IMF jumped in with their considerably deep pockets. It took a while to come up with a solution for Greece and now the world is wondering just how bad things are in the rest of the countries. Until more of this is digested and understood, the euro is bound to be under some pressure. The members of the EU are under a lot of pressure to restructure their rules. Until they do, the world’s financial markets are watching. This is BIG STUFF since the very act of restructuring means another round of compromise—individual countries giving up sovereignty.

Okay – so now I feel better. I feel good enough in fact to find a nice Belgian Wit in my fridge. If only I could find some Dutch pommes frits. Yummy. I hope you all had a nice May Day. Today is Cinco de Mayo which in Spanish means a big headache on May 6th.


  1. Larry, I am sitting here in Paris watching the European news; or shall I call it a real-time horror show.
    Riots in Greece and people attempting to escape a burning bank and being overcome before the rescuers could reach them.
    Angela Merkel coming on and saying that the future of Europe and the future of Germany( the strongest European economy) is in play. Pundits here are saying it is only a matter of time until these protests arrive elsewhere.....Zapatero in Spain comes on to call for calm, due to a rumor that the Euro was tanking and that Spain would default. My across the hall neighbor, Dominique Strauss-Khan, was just here to outline the bail -out of Greece..I am proud of him because he had freed up giant gold reserves of the this a panic -filled blip or shall I dump my Euro assets? Best from Lewis, ( in the thick of things)

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  3. I made a typo and deleted the previous one....Nice to hear from you Lewis...and to hear from someone who is at the battlefront! I think Europe will survive all this. There is too much at stake for the EU to fail. I don't pretend to be a forecaster but if you have a relatively long-term horizon, this might be a decent buy opportunity. Clearly panic pushes the price of EU assets down further than necessary for a time. Wasn't the DJ Average at about 8,000 a year ago? Of course much depends on leadership in Europe. I think the leaders will step up. But if they don't and they continue to discuss and argue, then a rational investor might conclude that these clowns will never get their acts together. In that case, I'd be out of European assets. Sounds like a nice day to be at Les Deux Magot (or the Indiana Cafe).

  4. wtf is a scofflaw? I AM delighted that we dug that Atlantic Canal. I told my students every year (ask Betty) that SOVEREIGNTY is the most important concept within the study of Government (and Econ., it seems). Take that to the bank (or IMF)... I enjoy your Blogalot!

  5. Interesting times as always. It is too bad that news coverage of the Greek drama is nil or buried (and understandably so).

    I don't envy the position of Angela Merkel. But she is in position to demand a steep price from other euro-zone countries for Germany's contribution to the Greek bailout.

    These protests always turn violent as the anarchists hide amongst the crowd to stir up trouble. Once a protest turns violent, deadly force is justified in my opinion. But not indiscriminately! Snipers, not tanks.

    On the plus side, once the protests fade away, Europe will be a cheaper place to visit this summer!

  6. Matt -- glad you are enjoying it!
    John -- you have to quit reading the Atlanta Constitution! The Financial Times is filled with stories about Greece!

  7. Well the stock market is tanking; and some peeps are blaming Greece

  8. CAC 40 down 14% today DAX -193 points
    A sovereign debt panic.
    In the "what's in it for me?" department the Euro have not yet reached the level for me to send some $$ is even a bit higher than this morning.

  9. I suspect the euro isn't finished bouncing around...

  10. Bought my Euros yesterday for our travels this summer @ $1.28 - best rate in more than one year. Keep spending, PIIGS, and we'll get the value back into the dollar.

    By the way, "pommes frites" are a decidedly Belgian product; I know because I lived there for seven years.

  11. Good man Jim. Will you take me to Europe with you? As for Belgium and frites, don't forget there are at least three Belgiums -- Flemish, French, and Brussels. I had a frites store two blocks from my apartment in Maastricht and it almost killed me!