All Focus on EU

It is the month of the EU. Sure, anyone with common sense would have focused on the EU problems for a few years now, but things are really starting to percolate. Seriously, Berlusconi and Papandreou both going down in the same month would have been unimaginable a few months ago. And why all the fuss.

Let's break it down. EU countries - focus on the PIIGS - are being required to do Severe austerity plans (that is with a capital S). Severe austerity is not conducive to growth in GDP, reduction in unemployment, or anything of the like, so these plans actually worsen their ability to pay their debts (how smart is that). It is a recipe for several hard years ahead to bring government spending within manageable means. It is a bit of a recipe for disaster as the cure is something that worsens the disease for perhaps a long time. Now I personally agree that austerity is necessary in proper measure and timing, especially for countries on the verge of bankruptcy, but I recognize it is not a cure. The better cure in my book is fessing up, defaulting, going bankrupt, and putting it behind you. Just my take. And by the way, the first ones into the default pool are likely the first ones to come out the other side cleansed of the default negativity. I mean who wants to by bonds of the last country that should default when you can buy bonds of a country that has already cleaned their debt slate. Bond investors care more about the future than the past. Your future ability to pay is all that matters.

And so the EU is still in the struggle, trying to hang on. I have no hope for a good outcome and only question the timing of when the worst will come to bear. Another unanswered question is whether all the kicking of the can has really bought any time for the banks to lower their risk. I suspect a little, but not a lot.

Disclosures: Not.

Finally

On January 1, 2009, among other predictions I noted I expected the U (as in Union) to leave the EU. I got some grief in comments on that post, folks noting I had no understanding of the EU. I admit at the time I did not fully understand the financial underpinnings of the EU and still do not today, but I do understand that the entire structure is not workable. You cannot have this many countries tied together in currency and not have a common governance, if not a common authority over matters financial. You simply cannot have a common currency among countries who are so disparate in their deficits, GDP and other areas. Cannot work.

And so my prediction of now nearly three years ago is perhaps coming to fruition. I do not see the EU disappearing just yet, but I do see it restructuring in the next year or two, with some countries leaving and, perhaps, some countries joining. We will see.

Whatever happens, the EU is toast in the medium term. I say medium as they seem to have titanium tipped boots that can really kick that can down the road. But the can - as Italy with bond rates over 7.5% is seeing, there is just so far you can kick this can.

Again, in my book it is better to do the defaults now and get past the pain as fast as we can. It will happen in time whether we force them to do so now or later. Now I am not good at predicting things (or at least their timing) but I am good at knowing what will happen at the end of the day. And at the end of the day, be it months of years from now, the EU is toast in its current form.

Disclosures: None