I gave a speech at an authentic Greek restaurant last night on the state of the world economy.
It seemed only fitting that the topic drifted towards Europe and fears that the Greek debt crisis will spread to other euro zone nations. With dramatic headlines of Greek troubles spreading and the euro hitting fresh lows against the dollar, the situation grows more critical each day. But today's news only highlights a part of the problem.
The real issue is one of denial and lack of resolve.
When the European Union was formed more than 50 years ago, there was much hope and optimism that this trading bloc would become a dominant global force.
The euro marched forward as an alternative currency for trade challenging the US dollar as the global trading standard. Everything seemed to be progressing as planned until a bit of bad news spoiled the party. Turns out that some member countries are having second thoughts about honoring their responsibilities to each other and are now putting their own country's agenda first. Meanwhile, as the debate continues on how to resolve the Greek debt problem, credibility is crumbling.
Measured self-interest is not a bad thing as every country has a right to make fiscal judgments that it believes are in the best interests of its citizens. But it's also important for member nations to remember the pledge they made when they decided to become part of the European Community. The chant then was "all for one and one for all". But it looks like that pledge only applies in good times and is instead subject to debate when tough times roll in. A union should be just that; a union. And the self-interest that is percolating throughout Europe is a grave threat to the solidarity of the euro zone.
Greece is not the only risk at Europe’s doorstep.
The Greek economy, while troubled, will in all likelihood be rescued by a combination of funding from the IMF and member nations. The real concern lies in the potential problems from Portugal, Italy, and Spain. Will we see a commitment by the stronger member nations to rescue these economies as they falter? With Standard & Poor's already downgrading the sovereign debt of Portugal and Spain, policymakers in Europe must already be thinking what to do if problems spiral out of control in these countries as well. Will they stand with member nations or leave these nations to burn like Rome in 64 AD?
Will they act as a union in 2010?
George Soros has said he believes that there is a real possibility that the euro will cease to exist based on the current discord among member nations. Jim Rogers and Marc Faber have said the same thing and they are being joined by a chorus of strategists who only see gloom for the future of the EU. I don't think the outcome need be that dire. But that outcome is all but assured if member nations forget their original pledge to stand together.
Perhaps the answer for Europe is to learn from the difficulties facing weaker country economies and embrace the responsibility for each other's well being.
The EU needs to take a look at what controls should be put in place to avoid going down this path again.
This sounds oddly similar to what financial institutions in the US are facing now.
Both situations are a mess of gigantic proportions brought on by a lack of oversight and an assumption that everything would always go well. The markets continue to prove over and over again that denial tends to lead to undesirable outcomes.
Things do not always go well.
Europe is facing a moment of truth and this will continue to be an ongoing challenge for the foreseeable future. The response of member nations during these troubled times will dictate the future of the EU as a trading bloc. The future of the euro currency hangs in the balance. Decisive leadership is needed as well as a willingness to face reality in order to avoid more difficult outcomes. Watch the headlines to see if a union still exists or if chaos is the chosen path.
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Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at firstname.lastname@example.org.