Europes's Sovereign Debt Hits U.S. Stock Market

by John M. Curtis
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Copyright May 23, 2011
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             Wall Street used Europe’s bad news to take profits, causing U.S. stock indexes to plummet.  While it’s tempting to draw conclusions from the EU’s financial woes, American investors would be well-advised to let Wall Street take profits rather than get overly alarmed.  Europe’s sovereign debt crisis has been going for some time, with the Frankfurt-based European Central Bank conducting a PR blitzkrieg about how they’ve got their problems under control.  Most economists know that the artificially constructed euro, launched in 1999, has served Germany—and a small number of other industrial powers—well but failed most other countries.  ECB likes to boast about its unrealistic requirement for member-states, including maintaining debt to GDP ratios of around 3.5%.  U.S. currently has a 10% debt to GDP ratio, dropping along with decreases in the unemployment rate.

            Little can be made of Wall Street’s unending buying and selling cycles, certainly not blaming every peak and valley on Europe.  “It was a bad weekend for the eruozone and in particular for those politicians and financial authorities trying desperately to keep the euro project together,” said Jeremy Batstone-Carr, director of private client research at Charles Stanley.  Launched in 1999, the euro was supposed to be Europe’s answer to the U.S. dollar, the world’s reserve currency.  Combing the collective GDPs of 27 nations, the euro promised more rigorous financial standards than the U.S. dollar, especially the debt to GDP ratio.  When the euphoria settled down, the euro worked well for Germany and a small number of other European countries but failed to help the vast majority of nations.  Great Britain refused to jump on the euro bandwagon, retaining the pound Sterling.

            ECB PR experts did a good job up till now of explaining away the eurozone’s problems based on the less industrialized south.  Europe’s more industrialized north pulled the euro’s wagon.  When Belgium revealed an equally bleak outlook, it opened up a can of worms, whether the euro could survive in the more industrialized north..  Problems with fiscal insolvency in Greece, Portugal and Ireland, and now countries like Italy, Spain and Belgium, rocked financial markets, with growing uncertainty whether the euro can survive.  Without coinage rights, Europe’s disparate economies depend on high-interest borrowing from the Frankfurt-based ECB.  Germany and France have always backed the euro to the detriment of other eurozone countries.  ECB talks about restructuring sovereign debt, looking for bailouts from the U.S.-backed International Monetary Fund and World Bank.

            No one really knows what will happen to the ECB once Greece either defaults on its debt or expect another $154 billion [$110 billion euros] to avoid national bankruptcy.  Eurozone’s most prosperous countries, like Germany, Netherlands and France, will have to absorb the debt of Europe’s failing economies.  Greece’s Prime Minister George Panpandreou admitted that his country would need more time to meet its debt obligations, kicking the can down the road.  Europe’s stock markets watched more profit-taking, with Italy’s major average dropping 3%.  Whether or not the sell-off continues is anyone’s guess.  If the past is any predictor of current trends, programmed buying will eventually kick-in, once averages are hammered down.  Profit-taking by Europe’s biggest funds doesn’t deal with the ECB’s basic problem of imposing a common currency on its member-states.

            Greece’s financial problems will continue to lead the way in advance of other European defaults.  Belgium’s financial woes dispel the myth that only poor southern countries can’t survive on the euro.  “Until euro policymakers understand that monetary union has intrinsic weaknesses and fragilities embedded in its infrastructure and fail to respond at the system-wide level, periods of instability will continue to be a feature,” said Jacques Cailloux, European economist at the Royal Bank of Scotland.  Cailloux stops short of asking the difficult question of whether or not the euro can survive.  Germany’s ability to carry the weight of other European economies is limited.  Without coinage rights, sovereign European economies can manage debt only by borrowing at high interest from the ECB.  Germany has avoided the real question of how much longer t he euro can survive.

            Frankfurt’s European Central Bankers continue to deny that the common currency has decimated all but a few prosperous European economies.  When the ECB talks about sovereign debt, they’re ignoring how the ECB as robbed Europe’s proud economies of their sovereignty.  Bank of England officials got it right in 1999 not taking the ECB’s bait of joining the European Common Currency.  Today’s ECB and euro has wrecked most of Europe’s disparate economies, forcing member-states into a type of servitude to Germany.  “The insistence from European policymakers in saying that this is a crisis affecting a number of sovereigns in the monetary union and not a crisis of the euro is increasingly being challenged,” said Cailloux, raising the real question of the euro’s survival.  Pretending that a common currency works for most eurzone countries denies a harsh reality.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.

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