The Guest Blog

Thoughts on Euro Summits- Pedro de Noronha

Pedro de Noronha|Fund Manager, Noster Capital

Summits are the sad state of the current European Union. Our European Union is marked by its bureaucracy and its reactiveness (instead of pro-activeness) to economic issues

Our politicians are sadly not capable of anticipating what Europe or their economies need—after all they are politicians, not economists. Even most economists couldn't see this coming, so this is not really the politicians' fault, more the failure of all of us to see the forest rather than focusing on the trees.

What is really at fault is that our politicians allowed the lies and the off-balance-sheet debt to go on for too long. Why didn't Germany or France impose on the weaker countries to strictly adhere to the limits imposed by the Maastricht treaty? Very simply, because they were breaking those same limits too, so they lost all the credibility to ask others to abide by them.

Most politicians want to be re-elected; they don't truly want the best for their countries, they want the best for them, and that's why countries piled onto irresponsible levels of debt, so that the incumbent politicians could "buy" their re-elections while mortgaging their nations' future. That time, unfortunately, is now upon us.

What happened in Europe over the past 10 to 20 years was almost like a Madoff event. The EU gave rules for countries to follow, but just like Madoff, the countries were their own judges and had quite a bit of leeway in creating off balance sheet debt that wouldn't compute into Eurostat's figures and they were their own auditors. The result is now out there to be seen. And it isn't pretty.

The problem with all the summits is that because the EU is one of the most incredible bureaucracies in the world, where we need 17 separate votes to change anything, these summits are nothing more than "cocktail parties" where these 17 members try to agree on things. The problem being there are 17 egos and political agendas at stake. Not easy to find a consensus. But anyway, don't smart people say that never a good decision came out of a committee meeting?

The only way to stop with this nonsense of summits every alternating weekend is to progress towards fiscal union. Something that in my view will be a step too far because the heart of the matter is that nobody in Europe feels European. There is no sense of Unity whatsoever. There are senses of entitlement but no one says proudly "I am European." For a business deal to work both parties in the deal need to be happy and feel like they are getting something good for them.

And that is the problem of the European Union, the weaker peripheral economies got all the goods already (in the form of cheap debt over the past 10 years) and are now unwillingly having to pay the consequences of their financial mismanagement. On the other hand, the Northern European countries don't want to keep subsidizing the truly ridiculous generous terms that Southern European (unproductive) workers have. So we now have a business deal where both parties to the deal are not happy. Hence why I believe the chances of success are slim.

Commending Angela Merkel

Even with politicians like Mr. Barroso, who left the prime minister role in Portugal to become the 3rd choice for EU president and leaving his country in dire straights to fulfil his own personal dream, who will be defending the EU with all he has, I very much doubt the EU will survive in its current shape much longer.

It is very sad, and I commend Angela Merkel for what she was able to achieve until now, as she has been the primary force of maintaining things glued together (and what a job that has been!), but at some point the Germans will realise that their guilt from what happened in WW2 shouldn't be the reason for such a tremendous bill...If the equilibrium in Europe continues to be so one-sided, It is only a matter of time until a politician will come to the top of the political echelon in Germany asking his people "why they need to keep paying for their sad past?". Sounds familiar?

The main issue with the breaking down of the EU is that it could be the catalyst for a less peaceful Europe going forward, and that would be a huge step back for humanity, and something that needs to be avoided at all cost. We are now in the 3rd or 4th generation past World War II. Most people alive today have no idea what it is to live without peace (myself included).

I sincerely hope we find a solution, which in my view could only be achieved by a complete restructuring of over-levered balance sheets (be it they public or private entities), wiping out the equity holders of troubled entities, equitizing the debt and press the reset button to a level of debt that our economies and corporations can handle. And from then on, really make sure we regulate our economies properly and don't allow for political agendas and our national egoism to surface again.

Whoever took too much risk needs to be penalized, and assets should freely move from weak hands into strong hands. That is what a properly working market does in any event. Governments should stop interfering with gigantic liquidity injections which will only exacerbate the problem. You can't solve a problem of too much debt with more debt...

But do we have a politician who would sacrifice himself to achieve this altruistic goal? No we don't. Where is the next Churchill or De Gaulle? People with charisma and with one goal in mind, to do the right thing, even if it costs them their job.

Up until then, the summits will continue.


The author is Pedro de Noronha, fund manager at Noster Capital