There is Always Good News During a Crisis

A rare sighting of good news in Europe – FT.com.

Good news neither indicates an end nor even an inflection point in a crisis. During the Great Financial Crisis in 2008, we read flashes of good news every day in mainstream media publications such as the Financial Times. Citibank, Merrill Lynch, Washington Mutual and Lehman Brothers were through with their writedowns several times and had put the subprime crisis behind them before succumbing to bailouts or liquidation. GDP numbers showed stable growth before being revised downward. Economists foresaw continued economic growth through 2008 and 2009 right before the worst economic downturn since the 1930’s.

There is good news in Europe, but this statement ignores the issue of amplitude. The one piece of bad news outweighs the total of good news. No matter how optimistic one can be in the wake of ECB crisis fighting efforts, only one fact matters. Specifically, the euro is causing a divergence in member countries creating two eurozones, the rich and the poor. Core and periphery, FANG and PIIGS are no longer accurate as France has moved into the ranks of the poorer countries. Here is the chart and table that matter:

Euro Fair Value

What the chart and table tell us is that Germany derives a major competitive advantage from the use of the euro, with the other countries suffering from an overpriced currency. As long as this situation persists, the euro is in danger of dissolution. The cherry-picked good news examples in this article are canards.

Ireland may have reached a deal to lower its debt payments. So what? The Irish remain under a crushing mountain of debt over 100% of GDP. With budget deficits over 13% for the last three years, the debt to GDP ratio will continue growing for the foreseeable future. Ireland is merely stretching out the pain. The EU should have absorbed the Irish bank bailout debt into the ESM. That action would have been a game changer for the Irish.

The author mentions “brighter spots” in the Greek economy. This statement has no factual basis. Greek GDP is shrinking at a fantastic rate, and there is no end in sight to the depression. Perhaps the bright spots he is referring to are from the old-timey wood fires the Greeks are using for heat this winter because they can no longer afford heating oil. By the way, mentioning that Greece has not been taken over by fascists or communists  in the vein of good news is an example of anchoring bias. The Greek situation is so desperate that the best news one can muster is that it is not being ruled by Hitler’s or Stalin’s successor.

Italy and Spain remain in political turmoil and recession and depression respectively. With the eurozone continuing to shrink, growth in the United States and China will not be sufficient to stoke demand enough to stop the recession in the eurozone.

Indeed, as long as these countries cling to the euro, they will remain economically weak and politically unstable. Germany will continue to reap the benefits of the single currency and do just enough to keep the scheme going.  Everything will remain the same, until it doesn’t.

 

 

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