11/26/12 - European Update

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Nov 26, 2012 12:07:50 PM

and tagged Europe

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I haven’t been writing much about Europe recently, and it’s not because there hasn’t been anything happening. There has been. But because most of it has been inside baseball, with little immediate effect (at least here in the U.S.), it hasn’t been as interesting as other developments here.

That largely remains the case, but it’s worth taking a look just to keep in touch with what’s been going on. The big news is that a bailout package for Greece is just about to be finalized. This will be the final bailout, as the Germans are having domestic political trouble getting approval for more cash.

Spain is also in economic trouble, but it’s delaying a request for a bailout because its regions continue to look to separate. Catalonia, for example, has just voted a majority of separatists into its regional legislature.

Germany is committed to continued austerity and is reluctant to provide additional financial aid for troubled nations until an agreement is made to limit their future spending. France remains committed to loosening the austerity requirements to support its own political needs, regardless of what the Germans think. The European budget talks recently adjourned without result because of this clash.

The European banking industry rescue is largely on hold until a central banking union is agreed upon. Negotiations are continuing, but the problem is that the most important financial centers, primarily Germany and Britain, have no interest in common regulation of their financial systems.

Britain has a strong euro-skeptic component in its population. It is threatening to veto European budgets unless spending is frozen. Most other countries oppose this, and there is talk of kicking Britain out, which would actually be welcomed by many in the British government.

Italy continues as a mess politically, but it is working to solve its problems under a technocratic government. Politicians generally support having the technocrats make the tough decisions, but they occasionally can’t help themselves and so they do something counter-productive.

As I read these paragraphs, I realize that, although there has indeed been news, there is really nothing new. Europe is continuing its own internal conversation about whether and how it resolves its contradictions. SNAFU—Situation Normal, All Fowled Up.

What is actually good about this is that it is not news. By that I mean, the world has accepted that Europe is not a systemic threat anymore and that the resolution of the European questions is now something for Europe to resolve. We don’t have to worry about it. Markets have largely ignored the latest iteration of the Greek “crisis,” for example, and the Catalonia election has been greeted with a yawn.

None of this is to minimize the potential effects of the problems in Europe, but for the rest of the world this is now normal. The normalization of the European situation means that, although negative tail risks remain—things could still go very badly—overall, the more likely course is slow improvement, as the Europeans work things out and the risk level slowly declines. We can certainly expect storms ahead, but in general the overall context has improved.

I will continue to discuss events as needed, but, based on the past couple months, unless there is a blowup, I will do another piece like this sometime in February or so. I hope.

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