What it comes down to is Greece and Ireland speculated on real estate and technology.
Microsoft , for example, shifted large operations to Ireland where tax rates.... and revenues.... were a fraction of the rest of Europe.
Good for job growth but in the end countries need enough revenue to sustain their economy. Too low taxes don’t work in the long term; at least not as low as Ireland pegged rates.
Greece and Ireland are now reaping the sour consequences of poor choices. It's possible that Portugal and Spain as well will go down the same path of insolvency. Real estate prices in these locales have plunged on average more than 40% making most real estate investors (and many banks) near insolvent. No amount of positive rhetoric can undo the basic fact that a house is worth half of what it once was. And not facing up to real estate losses can have huge long-term impacts (see Japan). More shoes are going to drop.
Who's next after Spain and Portugal?
Frankly, the United States is no different in terms of problems related to speculation. Bull environments never last and though the optimists try as best as they can to minimize the fundamental damage done by excess euphoria, the results are clear. In the United States this means foreclosures, decreasing available credit, a reining in of consumer behavior, and a massive hesitation by business to do that which is needed most; add jobs. Companies like Wal-Mart and IBM are the exception as they continue to increase payrolls but this is not typical. Job growth is stuck in neutral; exactly where it does not need to be.
The United States is stuck in a state of flux; not collapsing but not organically growing either. This is the natural consequence of excess euphoria and excess leverage. America has the benefit of having a currency still in demand by the world (at least for now). Of course the printing of money is not without cost and we shall see what inflation and default issues arise in the future. But the lesson is clear and once again needs to be recognized; excess risk carries huge consequences.
So as we watch Europe unravel, what should the United States take from this meltdown? The formula is quite simple but easy to forget in the midst of euphoria.
The prescription is this:
Face reality; don't hope for that which is highly unlikely Don't spend more than you can afford Pay off debts before you look to spend money on margin Be paranoid about the downside rather than focusing only on the positive Discipline, discipline, discipline
Simple right? Of course this will likely require a change in behavior for the American government and the bureaucrats that make spending decisions. But the time is now to recognize that this downturn is not like previous retrenchments and requires a change in behavior. And that change must happen now before it is too late.
The crisis in Europe is not over and you can expect to see more drama unfold between the haves and the have-nots. If the euro survives it will be a miracle; clearly the currency is already damaged. Amazingly, on an overall basis, the United States actually is looking fairly healthy which is an incredible statement considering the problems in America. But regardless of who is more damaged, the time has finally come for countries and continents to face up to the reality that prudence is not an option but a requirement.
Let's hope difficult choices are made to at least give Europe and the United States a fighting chance to compete successfully against emerging markets with surplus balance sheets. The clock is ticking; the time to act is now.
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 and 2010 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at firstname.lastname@example.org.