More than three months after British voters elected to extricate their economy from the European Union, Brexit still hasn’t actually happened. What’s going on?
The Next Big Thing to Worry About that you’ll soon be reading about in the financial press is Italian banks. Some Italian banking stocks fell more than 30% after the Brexit vote on fears that the Eurozone will experience weaker-than-expected economic growth. Worse: the Italian banking system now reports that nearly $400 billion worth of its collective loans are nonperforming—about 18% of the total. Compare that with the fact that, at the height of the financial crisis, only 5% of the loans in U.S. banks were categorized as nonperforming.
I’m not sure even what to say except that I want one of these mortgages! Also, I don’t imagine this ends well.
Today I was reading a blog post by Tim Duy titled “When Can We All Admit The Euro Is An Economic Failure” where he gives a brief, but solid rundown of the worsening economic depression happening in Europe.
The most striking part was the following quote:
The inability of troubled Eurozone economies to depreciate remains a key impediment to their return to growth; there is simply no cushion to offset the never-ending austerity.
When I think of Europe I am constantly amazed that none of the countries have decided to leave the Euro (the currency union). Sure, it would be tough for a few years, but tougher than what they are currently experiencing?
If Greece left the Euro, brought back its currency and devalued it would be traumatic and dramatic for everyone involved, but it would be REALLY cheap for anyone to travel to Greece. Tourism just happens to be big business over there and would subsequently boom as would exports. Not everything would be solved, but it would be a start and never ending depression would be off the table.
For the life of me I can’t understand why the indebted countries don’t band together and get out of the Euro, why stay in a system that only benefits Germany (who holds much of the debt-the finance much of their exports). Combined, these nations have enough debt to control Germany, not the other way around. At some point in a debtor relationship the tables turn, is it possible Spain, Portugal, Italy, Greece, Cyprus and the others don’t realize this?
I also hear the refrain that destroying the Euro will make commerce tougher and travel amongst the countries with all different currencies would be a step backwards. I think this is just a scare tactic.
Anyone who has worked with a smartphone knows that technology has leapt forward and that most transactions are digital anyway, I don’t need a nation’s currency in my wallet to make a purchase in that nation as long as my bank will instantly do a foreign exchange transaction (at a reasonable rate) using my Visa card. Corporations still deal with foreign exchange everyday, so what’s a few more currencies?
There is no good reason to allow continued depression in Europe. Which country will be the first to wise up and rise up? Germany knows that once that first domino falls…they all will.
I’m no expert on International Finance, but this doesn’t seem as difficult as it’s made out to be. No devaluation, no recovery. Sure, the ECB can buy bonds forever…but that doesn’t solve the situation.
So, any bets on whether someone will leave…if so, who will be first?
Scott Dauenhauer CFP, MSFP, AIF