Tuesday, June 26, 2012

Time to decide

Time to decideAtlanta, GA 6/26/12 (StreetBeat) -- All those involved in finding answers for the questions about the future of the European Monetary Union (EMU) insist that more Europe, not less, is the solution. There is a not an issue about a lack of desire to keep the euro zone together. And it can be said that the participants who are charged with figuring out the shape of things to come for the single currency membership understand that they must be credible from this point forward in a way that they have not always been since this crisis began more than two years ago. They will reiterate these aspirations and goals when they meet in Brussels at the end of the week and will present a plan that, they will say, is sure to achieve them. Of this we can be sure.

However, I think it can be said that there are conflicting views amongst the European leadership as to what “more Europe” means. And if there is not a unified concept on the final destination, then there cannot be a general agreement on the path that should be taken to get there. Given that set of circumstances it will be difficult, if not impossible, for anything that comes out of the summit to resonate with credibility in the marketplace and suggest that a sustainable solution has been reached. And if this summit does not provide a believable road map for the future of the EMU, even one that would take years to traverse, the market, more specifically the nuts and bolts of the financial system, could take over control of the situation and crash the whole project. “The very survival of the euro is under threat,” said former ECB council member Athanasios Orphanides at the end of last month; and it is possible, I think, that this week’s summit could mark the time when Europe’s wheels hit the ditch.

The EU summit will deliver a plan. Maybe it will be some variation of the banking union being pushed by Draghi, Van Rompuy, Barosso and Juncker. It may include a growth stimulus package and even another spin on the potential uses of the euro zone bailout funds. The market might even applaud the plan; a master stroke indeed!

But I think the time has come for the euro zone to deal with the fundamental cause of the currency union’s instability instead of only addressing the symptoms. Without more Europe underpinning the single currency it is hard to see how any plan will have a lasting positive effect. If the euro zone is not prepared to move closer together, credibly advancing towards a fiscal union, then it is likely that financial instability will force the membership apart. “One market, one currency” has come up short; it has exposed the differences amongst the nationalities involved rather than highlighting their similarities as Europeans. However, what are they supposed to do when some members consider a fiscal union to be an embrace while others think it will be a choke hold? Even if they had a common vision, how are they supposed to proceed when some members want to jump into bed right away while others insist on waiting until the marriage is official?

French President Hollande speaks for one contingent of Europe when he tells Merkel that a loss of sovereignty can be discussed tomorrow if she would just loosen Germany’s purse strings today. To Hollande the so called mutualization of Europe’s debt burden is a sign of solidarity that should be a precursor to mutually deciding on one another’s budgets. To Merkel and the Bundesbank the idea of joint liability is something that can only be introduced at the end of an integration process, not at the beginning. To the Germans it is no surprise that the countries that are now confronting the most acute financing problems are the ones that are most adamant about instituting joint liability ASAP. To Hollande and Europe’s periphery Germany has been a huge beneficiary of the single currency and it is not out of line to expect a helping hand instead of just the back of the hand. “Tomaaaato! Tomahhhhto! Potaaaato! Potahhhhhto! Errrr, let’s call the whole thing off….no, no, no, let’s not. Another plan will buy us another day.”

Another summit, another plan, another reprieve from the speculators, “We need to use all existing mechanisms to stabilize markets, to give confidence, to fight speculation,” said President Hollande over the weekend. Leaving aside the discussion as to what measure of the market movements in recent years has been the result of speculation, it seems to me that in the months ahead the thing that Europe must concern itself with is the rational decision making by banks, businesses and individuals. It has been reported that corporate treasurers sweep their euro cash balances out of European banks every night; who can blame them. Credit Agricole says it has repatriated its assets from its Greek subsidiary; taking a cue from the exodus of individual depositors? The French retailer Carrefour sold its stores in Greece for one euro to its local joint venture partner. “Power traders in at least four countries have reduced or halted electricity exports to Greece due to non-payments,” reports Bloomberg. “Euler Hermes, the world’s largest trade credit insurer, has said it will no longer cover deliveries to Greece,” says the Financial Times; a Greek retailers group says the move is of “exceptional concern, if not catastrophic.” Sure these signs of caution all involve Greece, but I don’t think those seeking haven in Swiss banks or in German securities are all from Athens.

These rumblings in the financial plumbing of Europe are not speculation, but rational decisions when doing business in a region for which there is little known about the path it will follow in the months and years ahead. It seems to me that if this week’s summit does not deliver a credible plan involving a fiscal union, something that can be believed to permanently solidify the foundation of the euro zone this kind of decision making will continue. And, if that is the case the economies of member nations will be all the worse for it. Will the financial strain make them dramatically run into one another’s arms in manner that, at the present time, they do not seem capable, or will it force them apart? The time to decide is fast approaching.

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