Yoshikami: The Euro's Bitter Pill

As the euro plunges to a four-year low against the dollar and respected economists like Paul Volker wonder out loud if the currency will survive, reflection is necessary to determine why this once prestigious currency appears to be crashing on the rocks of uncertainty.

Still, though its bad news on the short term, the European Union is actually doing what needs to be done now if the euro is to survive. (Track Currency Markets Here.)

It is clear that European regulators and policy makers have learned from the lessons of their U.S. counterparts and taken bold actions in the past week to bring confidence back to the markets. So far its not helping. The euro train wreck continues unabated.


The roots of this destruction of value are not unlike what occurred in the U.S. financial sector two years ago and the lessons learned from that catastrophe can provide guidance.

When U.S. banks like Citigroup and Bank of America plummeted in value, it was based on unreasonable expectations for future economic growth and lofty real estate values. The short sellers piled on the bad news and liquidity dried up further slamming the capital value of financial institutions. Denial prevailed until reality broke through.

Critics proclaimed it was a mistake of monumental proportions to let Lehman self-destruct. But behind the scenes, some cheered the collapse of Lehman as a line in the sand that the U.S government would not provide a guaranteed net of protection for every institution. But truth is it was not a line in the sand.

Rescues of massive proportions were soon to come.

After the panic that ensued post Lehman, the U.S. government started down the road of saving firms that were “too big to fail.” Mega banks such as Citigroup were given a lifeline despite cries of moral hazard. And that's what is happening with Greece today. They have been deemed too big to fail and Spain, Portugal, Ireland, and Italy are too big to go down as well. It may be a massive moral hazard problem but as Chairman Benrnake pointed out, perhaps the time to adjust behavior is after the fire is put out; it can be irretrievably destructive to let it all burn down and then pick up the pieces.

European member nations are faced with a difficult choices; intervene or accept collapse. In all likelihood, if one country fails, the entire euro experiment will fail as well. It remains to be seen whether the austerity measures will be accepted throughout Europe as it is a bitter pill to swallow for citizens.

Still, it is a necessary evil on the way to solvency. Hard medicine indeed. The crisis in Europe is another wake up call that financial accountability, just like it was in the U.S., is necessary and ultimately unavoidable.

The European Debt Crisis - See Complete Coverage
The European Debt Crisis - See Complete Coverage

We should applaud Europe for doing what is necessary even though they are late to act.

Hard choices today are what can lead to better outcomes in the future.

The simple truth is you can’t live beyond your means forever. Bills will come due one day. It happened with financial institutions and the economy in the U.S., and it's playing out now in Europe today.

Europe is trying to put out the hysteria fire.

It may be too late but at least efforts are underway to face the reality of the current, dire conditions. Its likely a more forceful response than the U.S. has taken thus far. in addressing its challenges; the can has been kicked down the road a slight shorter distance. Europe's actions are something the U.S. can learn from. Deficits, entitlement programs, insolvent banks, and a host of other challenges remain in the United States all requiring action. Though many criticize Europe, watch to see how they attack the challenges they face; lessons just might be learned.



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 m@ycmnet.com.