The Next Great Recession

I was born and raised in Europe and, although I moved to the U.S. about ten years ago, I still have strong ties to the region (where I have family and friends still living and working.).  I am therefore going to state the following through a completely realistic lense: The European Union, both monetary and politically, needs to break up. This statement does not make me proud, and I wish I did not have to say it but I am being realistic and this blog supports my statement.

First and foremost, the idea behind the EU was a great one but it is clear that its implementation has not been and will not be successful.  In my opinion, the wheels cannot be turned back as it is too late to fix the myriad issues currently plaguing the EU. There is a political process in place that does not enable a centralized decision making essential to keep up with the financial markets that due to investor behavior can act very quickly. This in itself is a recipe for disaster, and it will cause another Great Recession, similar to the one in 2008. In my mind this recession will be seen in twenty years to have been triggered not by a crisis in the financial and housing markets, as was the case in 2008, but by unmanageable levels of sovereign debt that partly came about by improper oversight. 

Second, a quick look at the history of Europe shows why the EU is bound to fail. The EU is a conglomeration of between 15-20 different cultures that date back thousands of years. One need only look at Italy, whose culture has been around since the times of Ancient Rome, to understand the inherent difficulty in trying to assimilate nations with such entrenched cultural, political and social norms. Or look across the map and think about Greece.That culture has been around since "before Christ" as well. How can a country’s decision making be changed after it has been framed by CENTURIES of history?! Even if you believe that the EU came together around a common idea, you are still faced with the issue that each  part of that union thinks differently because of the pride of being part of a particular country. 

As an example of how each country within the EU does not think alike, just read the current discussions behind whether or not Greece needs to be bailed out by the rest of the countries within the EU. A central issue in this debate is that individual nation leaders will likely face severe backlash and suffer political consequences if their own taxpayers were to bail another country out of their own mess. This political system is not sustainable and is just another reason why the EU needs to break up.

Moving from the political discussion of the EU to the monetary union, you will find that the story does not change all that much. At the bottom of the current PIGS (Portugal, Italy, Greece, Spain) crisis is the issue of the European Central Bank (ECB) not monitoring the progress of the members of the union.  It seems as if the ECB had stringent measures on what a nation needed to do economically (3% of Debt to GDP, or whatever the number was for example) to enter the union, but once the nation entered the union, there was no monitoring or compliance mechanism in place. This is outright ridiculous. It is akin to an investment management company having a legal team in place but then having a dysfunctional compliance process.  Such an investment management firm would certainly not be in business for too long.

We see this issue in other aspects of the economy. In 2008, we saw a situation where banks were left alone by the political system for over a decade (a political system under  two different presidents: Clinton and Bush Jr.), which resulted in very risky behavior by the financial system. Another example of a recipe for disaster! No matter what political party or religion you believe your views align more closely with, you cannot believe in a system that has insufficient oversight. This oversight has to be present, whether it is paid for by taxpayers or  by the private sector.As is the case with clearinghouses in the derivatives market, there needs to be oversight!

This lack of oversight will bring an end to the EU, and unfortunately, it will lead to Greece defaulting on its debt. Greece has been bailed out already, and bailing them out is not the answer this time around.  Why? 30% of the Greek economy is a shadow economy, (this was also apparent in 2010 http://www.businessweek.com/globalbiz/content/jul2010/gb20100728_303459.htm). What this means is that 30% of the government revenue is not being accounted for. You might think to yourself, who cares if the Greek government is losing 30% of their revenue because they are corrupt anyways, but that is not the point. The point is that there has been a culture for many decades not only in Greece but in other countries around Europe of being “lazy.” Cultures cannot change overnight and cultures will not change in two to three years. If you think the financial markets will wait until a culture changes, please let me know what your reasoning is behind it is, because I would like to believe in that as well.

There is a Croatian saying,  ‘Pomalo’, which means ‘bit by bit’ or ‘relax, calm down.’ I live by that saying not because I choose to be slow or lazy but because I choose to be relaxed and I don’t like dealing with stress; stress inconveniences me. The Croatian saying refers to a culture of relaxing on the beach, drinking wine, watching the sunset every day.   It  is a lifestyle that I am proud to have and I will never stop liking it. And it is also a lifestyle that most of Europe has adopted.  In the end, cultures cannot be changed by other countries.  The only way they can be changed is by force. I don’t think that any country would like to lose their sovereignty and let others forcefully change their mentality or way of doing things.

This is the case with Greece today and it may be the case with other PIGS nations but I have not read enough to accurately analyze the situations in Italy, Spain and Portugal. It is clear that bailouts need to occur to prevent panic from spreading in the financial markets but the ECB and the EU need to understand that there are Lehmans out there on a sovereign debt level as well. If there are a lot of Lehman Brothers out there, then the authorities and decision makers in Europe and internationally (like the IMF) need to let them ‘go down.’ One can ‘pick the losers and winners,’ but decision makers need to be smart and rational. In this case, the rational thing to do is to break up the union, and I do not like saying it!