Germany's Tough Medicine Can Save Europe . . .And Others

"Americans can always be counted on to do the right thing...after they have exhausted all other possibilities." -- Winston Churchill If we’re lucky, we may be about to see the European corollary to this Churchill quote. The reverse corollary would be that European politicians can be counted on to do the right thing for their debt crisis. . . when they no longer have any other choice. (It’s probably generally true of all politicians, but for today, we’ll focus on Europe.) The sovereign debt crisis in Greece has spread to become a crisis of confidence in the European Economic Union (EEU) and has the potential to explode into a global credit crisis on the scale of last year’s subprime debt crisis. However, since Europeans – the Germans and the Greeks more specifically – are very close to having exhausted all other possibilities, there is a good chance that a positive solution could come out of the mess in the days and weeks ahead. The unfolding events in Europe prove that a monetary union without a fiscal (budgeting) union leads to chaos. Greece, which represents only 2% of European GDP, now threatens to break up the whole European Union, an area of the world with nearly 400 million people and GDP about the same as the United States. That would be like a looming bankruptcy in the state of Tennessee bringing down the whole United States. Doesn't seem possible, but it's playing out before our eyes. We are now at the point where Greece can no longer sell bonds to finance its profligate ways unless other European governments agree to back them up. And, other EEU countries – really, it’s Germany that’s in charge here – can’t afford to let Greece implode without potentially causing a collapse of the euro and their own banks. The potential positive outcome mentioned at the top would be that Germany is successful in persuading Greece and the other PIIGs countries (Portugal, Ireland, Italy, Greece) to adopt dramatic, lasting, and effective austerity measures. In addition it is critical that the EEU figures out how to put more teeth into its paper-tiger requirement that no member country have an annual budget deficit greater than 3% of GDP. If these two steps are accomplished, in our judgment, the crisis will be averted and stability will return to Europe and the world markets. Admittedly Germany's fiscal measures for Greece and the PIIGS will be painful in the short run. But from what we know of them, they are the kind of common sense budgeting that every household on the face of the earth must abide by. We are hopeful that something close to the German austerity plan prevails in the capitols of Europe. Then let's start a petition that would require that the United States send a delegation to Berlin to see what our country can learn from the Germans about fiscal sanity. This would ensure that our country will not end up one day begging the world for a hand out. Investment Policy Committee Greg Donaldson Mike Hull Rick Roop Randy Alsman, Editor