Euro Zone Danger Zone

With all the bad news around the world lately — from ISIS savagery to North Korean nuttery, from Russian power plays in Ukraine to Chinese saber-rattling in the Pacific, from the Ebola outbreak in west Africa to Boko Haram mass kidnappings — nobody’s paying too much attention to Europe.  That’s unfortunate, because Europe is a mess right now.

Economically, Europe is a basket case.  In the second quarter of this year, Germany’s economy — the largest on the continent — shrank by 0.2 percent.  The most recent data indicates that business growth continued to slow in August.  In France, the economy is completely stagnant, producing no growth for several quarters while unemployment is above 10 percent.  The French economy minister resigned yesterday in a public disagreement with the country’s very unpopular President about whether France should follow austerity policies or policies that funnel government money directly to households; the economy minister said he felt compelled to speak out to try to avoid the European Union’s “descent into hell.” 

IMG_5596The unemployment situation in Europe is terrible.  Statistics presented by the European Central Bank president at an international conference last week are daunting — they show European unemployment growing while American unemployment is declining and indicate that the recession that hit the world in 2008 really hasn’t ended in the Eurozone.  The statistics also show that people who aren’t highly educated are losing their jobs by the truckload and that jobs are vanishing in the business sectors that traditionally employed less educated people — like construction and heavy industry.  The service sector is holding steady, which means that if you’re looking for a job in the Eurozone and you don’t have advanced degrees, you’re lucky to get a position as a waiter.

When economies fail and bitter people can’t find jobs to fill their time and feed their families, political and social unrest follows closely behind.  It therefore shouldn’t be a surprise that we are seeing a deeply troubling increase in anti-Semitism in Europe, from public protests triggered by the Israeli-Hamas fighting in Gaza to attacks on synagogues and social media hate speech.  The fact that some Europeans are returning to virulent anti-Semitism of their forefathers indicates that the EU initiative really hasn’t materially changed a continent where prejudices run deep.

The economic, political, and social situation in Europe is a toxic mix.  Other crises have distracted attention from the various Eurozone woes, but we shouldn’t ignore what’s happening across the Atlantic.

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Uh Oh (Again)

The news from Europe has not been good for some time now — but today may be a turning point into even more negative territory.  As the United States enjoyed the Labor Day holiday, equity markets across Europe plunged by an average of 4 percentGermany’s DAX took the hardest hit, falling by more than 5 percent.

It’s not hard to understand why European investors are troubled.  Greece, Spain, and Portugal all are struggling with serious debt problems, and recently Italy, one of Europe’s biggest economies, also has tumbled into distressed territory.  In the meantime, the large, more solvent northern European countries — particularly Germany — have had to prop up their profligate southern European partners.  Germany’s financial support of free-spending Eurozone countries hasn’t gone down well with German voters, who delivered a stinging rebuke to the ruling party in regional elections.

Interestingly, some political leaders in Germany and elsewhere seem to see the ongoing problems as a reason for an even closer political and economic union between the nations of Europe — whereas European citizens, in contrast, appear to be yearning for more control over the destinies of their own countries.  The depths of the Eurozone debt problems are not yet fully understood, and analysts wonder how much worthless debt is held by European banks and whether the piecemeal bailout efforts will ever staunch the outflow of investor confidence.  Given all of these circumstances, it’s not hard to foresee more hard times ahead in the Eurozone.

A Costly Solar Flame-Out

Federal stimulus efforts to encourage “green energy” businesses took a shot to the chops today when Solyndra, a California solar energy company, declared that it will file for bankruptcy protection.

Solyndra had received $535 million in federal loan guarantees and was one of 40 concerns that was supported by a Department of Energy program designed to encourage green energy projects.  Today, however, the company suspended its manufacturing operations and laid off more than 1,000 workers.

It is not clear how much money the federal government will lose as a result of its support of Solyndra, and some no doubt will argue that such losses, whatever they may be, are simply a necessary cost of trying to develop “green energy” alternatives in the United States.  For others, however, Solyndra’s failure is a sobering lesson that even significant federal support doesn’t mean much if a company cannot hold its own in the rough and tumble world of the global economy.  In this instance, Solyndra apparently couldn’t compete with foreign manufacturers who sold comparable products at cheaper prices.  This story also raises more fundamental questions:  why should the federal government be supporting certain companies and industries at all, and when they do who is deciding whether the investment of our tax dollars has a prayer of earning a meaningful return?

 

Market Jitters

Yesterday’s wild ride on Wall Street is one of those incidents that is profoundly unnerving to the average investor.  It is hard to believe that the Dow Jones Average sank more than 1000 points, from high to low, before rebounding somewhat.  Weeks of slow gains were wiped out in the blink of an eye, for unknown reasons.  And who knows what today will bring?

The news stories about the event have questioned whether there was some trading mistake, whether there was market manipulation, whether some robo-trading programs were inadvertently triggered, or whether someone actually hacked into the New York Stock Exchange.  Anything is possible, I suppose, but I think the more likely scenario is that investors are extremely skittish — and they have a lot to be skittish about.  The Greek debt crisis continues to be a huge problem, other debt-ridden EU countries may not be far behind, and their more solvent EU partners may be balking at more bailouts.  In America, after months of bland assurances that the economy is on the upswing, we aren’t seeing much real job growth or signs of significantly stronger economic activity.  In the meantime, America seems to be piling up its own debt at an astonishing pace, as if the country were bidding to outdo Greece.  With this kind of national and international context, is it any wonder that markets are jittery?

Greece And California (Cont.)

I’ve posted before on the problems with Greece’s debt and its implications for the European Union and its member nations.  Today a deal with respect to Greece’s debt problems was announced; it involves pledges of support for a financing plan by EU countries and lending from the International Monetary Fund.

Looking at the deal that has been struck, it seems calculated simply to calm the markets for the moment and stop,  or at least slow, the headlong slide of the Euro against other currencies.  If the markets aren’t calmed, don’t be surprised if another European summit is needed.  The deal also does not address the political fissures exposed by the Greece debt crisis, with German citizensm, for example, feeling like the ant being asked to subsidize the grasshopper.

Two points in the linked article are of particular interest to those of us in the States.  The first is the notion that Greece is having to refinance its debt at a 6 percent interest rate because of investor concerns about its ability to repay the debt.  If investors were to be similarly insistent on higher interest rates for American debt, our budget deficit, and the amount of our spending consumed by debt payments, would skyrocket.  That is a sobering concern.  The second point of interest is the chart showing budget deficits as a percentage of GDP and overall debt as a percentage of GDP, in Great Britain and certain European countries.  The picture is not a pretty one, and suggests that Greece may just be the first of a series of European countries to face severe debt problems.

Uh Oh

Dubai World, the state-owned company that has been borrowing like crazy and building artificial islands, fantasy structures, and other projects to convert Dubai into a kind of vacation wonderland, has announced that it will not be making interest payments on its loan debt.  In other parts of the world, where the markets aren’t closed for the Thanksgiving holiday, the reaction apparently is panicky and some banking stocks are getting hit hard.

My guess is that traders everywhere are still jumpy after the near meltdown that happened last year, and any sign of possible significant default by a big borrower is going to make the markets especially nervous and curious about on whose balance sheets the eventual liabilities may land.