Europe's real problem.

[Swampy]

It's not the debt; it's the socialist policies that stifle growth. As Robert J. Samuelson said, Italy has policies that make it hard to fire workers, so companies won't hire; it also had many industries with licensing policies that effectively limit competition. The result is Italy, like much of Europe, can't recover, unlike the US or Asia.

Economists have known about this for decades, but the European politicians are refusing to do anything about it. And, now, Obama wants the US to be more like Europe. Go figure.

[mcnoch]

I always find it funny when you speak about Europe and socialist politics in one phrase. It clearly shows that the following sentences will be based on assumptions which reflect a Europe that might be older than me. But as you life on the other side of the Earth, most likely the information you have about Europe is as good as the information we have about America.

The cause why Europe was hit so hard by the financial crisis is that the aggressive price-competition of the recent decades of turbo-capitalism have eroded the loans and salaries in Europe so significantly that the financial middle class exists today only in the text-books of some business analysts anymore. The massive over-production we saw in many countries in Europe has caused because the MBAs believed that this would reduce price per piece and would help to see growth, even against competitors from India or China. So please forget to tell Europeans about the miracles of capitalism, they failed, all, repeatedly as even our economic experts confirm. Only some 4rd class MBAs still preach this, as they have memorized their textbooks word by word instead of understanding it. Even in the UK they have stopped believing in those old schools of thought and try to build something new. The first thing the economists have learned now is that states and societies are no companies and so can’t be managed or run like such. They have different rules and factors to observe.

If a company is in trouble it can lay off all kind of workers, we did that in 2009/10 too. The claim that they would hire younger people but they can’t because they can’t fire the older people is just an excuse. Very often the companies have invested a lot into the skills of their employees and despite all nice college and university degrees those skills of the younger people these are just part of the skills you need. For many areas the university knowledge is a too high qualification. The number of high qualification work saw only a limited growth in the past decades, so the universities have produced way beyond demand. And the “Generation Y”(as the people between 20 and 30 years are called here) is a very self-opinionated, niggling and mentally inflexible group of people, not the best start-conditions to work in large companies. So most large companies wait with hiring them, they need to go thru the school-of-life before and reduce their requirements. Hard lessons for a generation that so far had lived the good life of kids in TV-series. And the second point why the companies don’t lay off experience works is that the aging of the societies here make it necessary to keep the older workers as long as possible as no longer enough young people – fit for the job – are coming up anymore.

[Sir John]

I thought it was a case of too much expenditure and not enough income, virtually right across the EU with couple of exceptions.

The too much expenditure is usually about benefits in the form of pensions and too low retirement age, and the too low income is about low taxation and other government income.

Yes EU banks are a mess, mainly because of stupid lending policies, and if true valuations were used, would be bankrupt! The business environment is just the result, not the cause.

Austerity will not work as it handicaps the entire economy, and usually means less income to service the debts they currently cannot service without borrowing ever more money.

Until such time as this income expenditure is 100% solved, NOTHING will change for the better, just the opposite. It will come to a head soon.

...and Italy + Spain + France will NOT be allowed to leave the EU, it would be a admission of defeat and failure for the EU

SJ

[mcnoch]

SJ, you mix up the public budgets with the private budgets.
The reduced public budgets would have an impact on the private economy, but would normally not cause a crisis. But as the private economy is in crisis with high number of unemployed people since the crisis started, it can't compensdate this, as I wrote in the Euro Deathwatch Thread recently.

The big banks in the EU were a mess because they followed the same lending policy as the US banks did to stay in the business, so this is not an European problem alone.

[Sir John]

Matthias,

Do a 'google' on "Community Reinvestment Act 1979' and I think you will see the basic reason for the terms "Sub Prime" and "Junk loans".

This piece of socialist (Pres Jimmy Carter) insanity mandated that American banks had to grant housing loans in any area that they accepted deposits. This went against all basic common sense for a banker worth his salt. It also went against 400 years of banking history and rules of prudent lending.

The US banks knew this, and fought it in the courts - and LOST!

So they made the loans, no matter how unemployable the applicant may have been, or how destitute his financial position was, or how derelict the house was. If he was a "minority", he got the loan.

So the banks made the loans and immediately sold off the loan to someone stupid enough to buy it.

The end result is history.

I cannot say why European banks have so many bad loans, I have not heard of a EU equivalent of the US Act. Maybe it was sheer stupidity by the lending officers, or it may have been standard bank policy.

Any sensible banker should have seen the 'bubble' developing in the EU housing market, and would have restricted their lending into it.
Most of those junk loans in Europe are still on the banks books at base value, and that is keeping the fairy story going that the banks are solvent. They are NOT!



SJ

[Sir John]

www.businessspectator.com.au/bs.nsf/Article/eurozone-Europe-GFC-crisis-ECB-Germany-pd20130306-5J38N?OpenDocument&emcontent_spectators&src=rot


A good assessment of the current EU debacle. A bunch of not very good 'leaders', good at talk, BAD at action.

In due course, they will go to the very brink with no other action possible, and they will PRINT. No matter what the rules and laws say, they will print the 10s of Trillions of Euros and buy ALL the bonds and bail out ALL the banks, and let hyperinflation rip to wipe away the debts.

Very possibly (probably?) this year.


SJ

[mcnoch]

The currency crisis is over and if it comes again, we have new tools to get the same effects of a partial default without declaring one. So, I'm not that worried about this. Such measure might become necessary later this year. These buy-backs of bonds for less than the full price to reduce the amount of debts worked well for Greece and can be used for Italy and Spain. As Germany is making a profit of about 60 billion € from the unexpected reduction of rates it has to pay for its own bonds, we all know from where this money will come, the questions is only whether this will become necessary before the general election in Germany or then surely after it. While saying the contrary in public, all four main-parties in Germany agree about this.

What is keeping most European nations in a deep recession is that the low rate credit-bubble busted and revealed that surprisingly many middle-class people where working as freelancer or for small companies that didn't earned sufficient money, but barely enough to survive with low-cost credits, refinancing one credit with another. That is why we saw such an enormous increase in private/small business credits in the past decades. This system had to fail apart but was fueled by many public funding projects to help people to fund their own small companies and so avoid the unemployment when the big companies were cutting jobs in the 10 000 due to globalization. All these credits have been move long ago into bad banks, so no banking crisis will result from this. But an unemployment crisis in the political active and educated middle class was caused. It is believed that about 60% of the jobs lost during the crisis will be lost permanently. At the moment the pressure is mounting onto the big international companies to reverse their globalization in some areas and bring back jobs to USA and Europe for the sake of domestic economic recovery, which is more threatening for these companies than a higher price for their products. Fashion and industry are the main areas of focus here. Additionally the expected growing problems to get enough staff in coming years due to the aging of the population might help here, but not so quickly as many politicians would like to see.

All this will mean of course a reduced growth and return on investment for the share-holders, but most of them will be happy with a o%, when faced with a -20%. I don’t believe in hyper-inflation, it didn’t proofed to be a good tool for the big western industrial countries, better suited for less developed countries. The main factor for driving the inflation in the western nations will be the climbing energy-costs, which are triggered by other factors.

[Sir John]

Generally, the EU governments have not come close to fixing their budget deficits, the debt load is growing ever larger and a recession only makes that worse.

'Haircuts' by the lenders/bond holders is a is a path to hell, and Greece is NOT solved at this time, she is still drowning in red ink, as is Italy and Spain and soon France. How can the lenders to those countries take "haircuts"? The amounts would wipe out their shareholder funds and reserves, easily.

How the average EU worker or family reacts (apart from tax) is really immaterial, it is what the governments spend and borrow, and what the banks lend that matters.

The EU debt crisis is not within a bull's roar of being "over".


SJ

[mcnoch]

>>debt load is growing ever larger

No, that is plain wrong. What was growing is the debt-rate as the tax-income was falling due to the bad economical situation.

[Sir John]

Sorry, but the debt to GDP ratio is growing, and those in recession are ever more worse off.

....and if tax income is falling, then in all probability, budget deficits are growing, unless expenditure falls to compensate. They are all trying to keep those deficits under 3%, and not all are succeeding. Some have no hope of it.


SJ

[Deleted]

Many Europeans are stuck in a time warp with their Royals and magic kingdoms , their debonair elan the knowledge of the ages , in the 21st century they are 20th century citizens .

[mcnoch]

Mar 6, 2013 19:19:22 GMT -5 Sir John said:

... unless expenditure falls to compensate.

That is exactly what is happening with all the budget cuts.

The 3 % ratio is at the moment not doable for most, as the GDP and tax-income is shrinking too, but the total sum of debt is shrinking too.

[Sir John]

"The 3 % ratio is at the moment not doable for most, as the GDP and tax-income is shrinking too, but the total sum of debt is shrinking too."



How can that possibly be?

The 'mcnoch budget' is maxed out and adding 3%+ every year. The only 'haircut' is the ones lending to Mrs mcnoch, and all the other family members are getting worse every year.

The mcnoch family income is shrinking, and the expenses are rising.


SJ

[mcnoch]

Let's say I have an annual budget of 1 mio €, of which 600 000 € are coming from credits (debt-rate 60%) and 400 000 € from my own revenues. Let's say I pay 6 % credit-rates (36 000 €) and have to repay that year 15 % of my credit (90 000€). This leaves me 874 000 € to spend.

Now I'm in a crisis. Unable to get fresh money I still have to repay my annual 15%, which I did. So I have now 510 000 € from credits and due to shrinking income only 300 000 € from own revenues. With the 90 000 € I have to repay and the 30 600 € credit-rates I have only 689 400 € left to spend and have to cut my spending on holiday travels, no new car, etc.. . My debt-rate would be in this case 62,9 % with 90 000 € debt in total less. That is the reasons why most countries are in danger to violate the 3 % max debt-rate increase KPI even without taking new credits.

For some budgets it might have been possible to reduce the credits more due to some financial wizardery, but if their income from reveneues was shrinking more, they still face increasing problems.

[Deleted]

The more intelligent of us do not go in debt as there is no benefit in that ( I would exclude house payment and car payment from that as they are nessities ) .