A metaphor I have used repeatedly to describe the European crisis is Hurricane Season, where individual storms brew up and slam into the mainland, with the consequent damage that implies. It is a good metaphor, which is why I use it, but it occurred to me as I looked out my window at a real hurricane that it was worth another look right now.

An interesting couple of days in the news. Yesterday, the lead story in the Financial Times (FT) was “Fears over US banks’ mortgage dominance,” which discussed how the banks are making too much money off the refinancing wave. I have to say, it is interesting to note the change that has occurred when we see this kind of article, as opposed to the ones that focus on failing banks. This follows earlier articles about higher-than-expected profit gains at J.P. Morgan and Wells Fargo and suggests that the U.S. financial system is actually getting to be in pretty good shape.

Now, for the aspera. The big news today is the surprise resignation of the CEO of Citicorp and his immediate replacement by another executive. The story made the front page of the major papers, as it should, because it’s a little strange. Supposedly, the board has been discontented for a while, and the CEO just decided to resign. Certainly possible, but it does not usually play out that way. This sort of suggests that there is something else going on, and if so, it should emerge shortly. Perhaps the U.S. financial system, at least as far as the large banks go, isn’t out of the woods yet.

I have been getting some feedback that, although people like the blog, there is a sense that it is pessimistic. To which I can only say, pessimistic? Me?

Looking at today’s news, there really isn’t a lot that’s new. Election. China/Japan. Europe, Europe, Europe. Nothing we have not already talked about—a lot. So I am going to go back to yesterday to look at what I think may be a big story going forward.

When a major financial paper has not one, not two, but three stories on a particular topic, you have to assume it’s probably a big deal. The Financial Times had three stories on Walmart and American Express’s launch of a new product intended to take on the banks. The product is a separately branded, prepaid card that can be used as a debit card wherever AmEx is accepted. According to the stories, the card is aimed at lower-income households that are tired of or unwilling to pay the fees charged by most banks. Walmart wants to replace the bank for its customers.

The slowing global economy was the big story this morning. It was front-page news in the Financial Times (FT) and the Wall Street Journal (WSJ), with “IMF cuts global growth forecasts” and “Global Recession Risk Rises,” respectively. Although it didn’t make the New York Times (NYT) front page, it did make the front of the business section, with “IMF Lowers Its Forecast for Global Growth.”

The short version is that Europe continues to tank, China continues to slow, and the U.S. is at risk because of political uncertainty. The IMF is projecting continued though slower global growth, but that depends on a few criteria: Europe implementing the sovereign bond purchase program successfully and navigating its multiple other problems, China achieving a soft landing, and the U.S. not going over the fiscal cliff. A hefty set of assumptions.

I talked in the previous post on Europe about how the departure of a significant country could lead to the demise of the eurozone. Significant would obviously mean Germany, but also France, Italy, Spain, and, arguably, the Netherlands. These are the five largest economies in the eurozone, which together comprise more than 80 percent of the total economy. To break it down a bit further, Germany is 28 percent of the eurozone economy, France is 22 percent, Italy is 16 percent, Spain is 11 percent, and the Netherlands is 6 percent. Everything else amounts to 4 percent or less—in most cases, much less.

What is striking about this list is that only two of the big five are in good condition, fiscally speaking: Germany and the Netherlands. Combined, they account for 34 percent, or a bit more than a third of the total. All figures are as of 2011, as reported by Eurostat, and obtained from Wikipedia.com.

http://www.youtube.com/watch?v=IZJ7VG30tsw 

I have written many times about Europe and its problems, but always with a provision: because the European Union is ultimately a political project, rather than an economic one, politics will trump the many economic problems and the eurozone will survive because of that.

Oh, yes—spending cuts! The papers this morning are all about both. The key article, and the one most people (160 million of them) will be talking about shortly is on the front page of the New York Times (NYT), “Payroll Tax Rise for 160 million Is Likely in 2013.” The expiration of the 2-percent payroll tax on earnings will hit everyone immediately in the new year, and it’s not likely to be reinstated.

This is just a part of the fiscal cliff, which is becoming clearer and clearer as the election approaches. Taxes will be going up, and spending will be cut—the question is how. “Way round the fiscal cliff still unclear” on page 2 of the Financial Times (FT) is pretty self-explanatory and leads with the conclusion that Congress is unlikely to resolve the issues in 2012, leaving another potential pending crisis in 2013. Patriotic citizens are glad to contribute more, led, of course, by private equity managers. According to “Private equity managers fear tax hit” in the FT (p. 17), they are attempting to rewrite existing agreements to specify that they will make more money to compensate if their taxes go up. Clients, unsurprisingly, do not seem to be in favor. No doubt, the managers want to make sure they can continue to spend and stimulate the economy, which will then trickle down.

We seem to be moving out of the eye of the European hurricane, as the winds are starting to blow again and people are taking cover. Spain and Greece made the front pages of the papers: the Wall Street Journal (WSJ) has “Bottles Fly as Spain’s Confidence Shatters,” accompanied by a photo of a bottle shattering on a building right by an older woman’s head as she takes cover; the Financial Times (FT) has “Spain’s premier fights turmoil,” accompanied by a picture of what looks like a masked riot policeman assaulting a member of the Spanish parliament; and the New York Times (NYT) has “New Protests Over Austerity Plans in Greece,” with a photo of a masked riot policeman running away from the remains of a Molotov cocktail. All three papers also have follow-up articles on both the Spanish and Greek protests to provide more context. Although the photos are quite scary, this is not just a photo op—it goes much deeper.

This is what it looks like when all the choices are bad ones. Everyone is looking for a solution that doesn’t require any sacrifice. The Catalonians are convinced they are paying too much, so they want to separate, which, of course, would make the problems worse for everyone, including themselves. “Spain Resists Homage to Catalonia” (WSJ, p. C12), “Spanish Ire Symbolized by a Carrot” (NYT, p. B1), and “Financial crisis stokes fires of Spanish identity” (FT, p. 4) all center on exactly this issue. What is the relevant governmental unit in Europe? At what level should different communities hang together and sacrifice for the common good? Without solving this fundamental issue, can any other issue be solved?