European Crisis Will Strengthen the Global Economy
Much has been said about the European crisis and understandably, mostly in a negative context, but I wanted to offer you a different point of view– from a macro and longer-term perspective. In my opinion, this crisis will strengthen the Euro Zone and create a stronger foundation for the global economy, based on stronger fiscal alignment.
Addressing Foundational Holes
This crisis is testing the very founding principles of the European Union. In other words, there have been several economical crises, such as Ireland’s, Greece’s and soon to be others, that have forced the politicians to scramble, but also to finally address the holes within the loosely-framed European economic policy. Yes, these times are unprecedented, concerning and they certainly have short-term negative implications, but my contention is that these holes would have never been addressed, had the problems never arisen in the first place.
German Yields Could Be the Key Trigger
As I write this post, Spain’s borrowing costs are soaring– its ten-year treasury is soaring more than 7%, while Italy’s yield is heading north of 6%. These same levels pushed Greece, Ireland and Portugal to seek bailouts. The key signal: pay close attention to the German bond yields. German bonds have been considered the safe-haven within Europe, and in fact, yields on short-term German bonds traded in negative territory. In other words, investors were willing to pay the German government a fee to keep their money, instead of looking to get a positive return.
However, in the last trading sessions, there has been a significant reversal. The German yields are rising sharply off their lows to more than 1.5%. One can interpret this action as an overbought condition, or, in my opinion, as a signal that investors are starting to assign a certain level of risk to German debt in light of the dire conditions of its neighbors. If this rise continues, Germans will start feeling this pain and it will be then that the Merkel government will finally be forced to change its long-held position of strict and unbending austerity medicine across the E.U. (Of course, the other trigger would be if Spain and Italy will need to be bailed out, which is only a matter of time given their anemic growth rates).
Sustainable Global Growth
Once this shift in policy takes place, sure, you will see more printing of money and rising inflation, but it will more importantly allow for the much-needed growth that is desperately required to rise above this economic malaise. What will be the outcome? It is for certain that more debt will be issued and existing debt will need to be restructured with longer-term repayment periods, in exchange for greater fiscal alignment and regulation. Growth initiatives will be introduced, spurring confidence (very critical component of growth) and unemployment will gradually decline. Global equity markets will soar. Companies will shift their investment strategies from a defensive to an offensive stance. Greater fiscal alignment and regulation (as long as it is not excessive) will also provide stronger measures to weather future economic storms.
So despite the bleak news, this is all good news for the global economy, and will provide all of us with stronger footing going forward.