Have the Euro Zone Bears Got It Right?

It was 7:48 a.m. in London on August 7, 2007. Flashes crossed the wires from the Reuters news agency saying BNP Paribas was to close a number of funds due to redemptions and Squawk Box Europe anchor Geoff Cutmore turned to private equity investor Jon Moulton and asked him what this meant. “This is how it will all start,” said Moulton.


Five years later some of the biggest names in banking and politics have been swept aside by one crisis after another that have struck the banking and credit markets. Some economies like China, the U.S. and Germany have weathered the storm pretty well and those who played the huge market volatility right have been well rewarded. There are always winners but the majority have lost out.

Pensioners have seen their life savings hit hard and struggle to make a return in a world where so-called safe-haven bonds return just 1.5 percent. Young people who have invested time and money in education find themselves entering job markets where youth employment has topped 50 percent in the worst hit economies such as Greece and Spain.

The chances of things improving significantly appear remote following hundreds of crisis summits and initiatives that have brought us no closer to an end to what many now describe as the ‘new normal.’

In this environment, it is very difficult to be optimistic about the future, and the economic bears, who have been big winners in the crisis, are warning things are about to get worse.

“(The) 2013 perfect storm scenario I wrote on months ago is unfolding,” Nouriel Roubini said on Monday amid signs of slowing growth in the U.S., China and the EU.

As the markets speculated on whether the Fed would add yet more stimulus to the system, Roubini dismissed the impact of central bank intervention on the real economy. “Levitational force of policy easing can only temporarily lift asset prices as gravitational forces of weaker fundamentals dominate over time.”

The International Labor Organization put the scale of the crisis into focus on Wednesday when it warned that having lost 3.5 million jobs since the crisis started, Europe risks losing another 4.5 million jobs (related: America's highest-paying jobs) unless things change quickly.

It is becoming increasingly difficult to argue the case for a significant economic recovery with so many headwinds facing the global economy. Amid a bitter battle for the presidency in the United States, job growth remains a huge election issue, even more so after Friday’s weak June report.

“Bulls call the disappointing June jobs report a lull; bears think of it as the calm before the storm,” said Nicholas Colas, the chief market strategist at ConvergEx Group on Tuesday.

Even if you dismiss the risk of a major financial crisis in Europe spreading to the rest of the world, Colas believes the threat of such an outcome is holding back growth.

“It is clear that the vector of contagion from the financial problems in Europe is not, in fact, the global banking system. Not yet, at least. Rather, it is in U.S. corporate decision making about maintaining lean cost structures domestically to hedge against the risks of a deep recession in Europe,” said Colas who believes U.S. growth will do well to top 2 percent this year.

“That isn’t likely going to tempt the typical hard-nosed Chief Financial Officer to approve much incremental hiring. Layer on the very real threat of a deep European recession, and they will be pushing operating managers around the world to cut heads,” said Colas.

Europe's Debt Crisis Refuses To Go Away

No matter how hard EU leaders and policy makers try, the European debt crisis refuses to go away with each new decision failing to lift investor, business or consumer morale.

If you listen to the politicians they will attempt to assure you that Europe is working through its problems in a systematic way that will ultimately put the euro zone on a path to sustainable growth. Germany demands everyone else get their fiscal house in order before greater steps are taken towards the United States of Europe and a single bond market, which Paris, Madrid and Rome want.

Berlin has made concessions, but not enough to convince investors that the crisis is being addressed. Spain remains in the borrowing cost ‘danger zone’ while Italy was on Tuesday warned by the IMFthat it must do far more to break its “high debt spiral” following two weeks of summits and meetings in Brussels.

“Although the recent European summit failed to deliver anything substantive in terms of detail or prompt action, the statements were significant inasmuch as they suggest the authorities have finally acknowledged that the institutional architecture of the euro is flawed, as well as features of their rescue policies,” Yiagos Alexopoulos, a European economist at Credit Suisse said on Wednesday.

“Correctly diagnosing the problem is the first step towards addressing it,” Alexopolous added, noting that investors are entitled to be skeptical.

“The issue is not whether Italy and Spain can remain in the euro but whether the euro can remain in Italy and Spain. The outflows are growing — in Spain’s case they are running at a rate close to 50 percent of GDP — and broadening.”

“If uncertainty over the future of the euro was to diminish, so too would the vigor of these capital flows and their negative impact on the real economy. So it is of considerable urgency that Europe credibly implements the summit announcements,” said Alexopolous.

Others are far more skeptical, with Carl Weinberg at High Frequency Economics this week saying he is throwing in the towel on the debt crisis.

“What Euroland needs is a king to knock together heads of all the princes of all the provinces, or rather nation states need to do the right thing for the kingdom. No King is apparent, so no hope of an orderly end to this mess is likely," Weinberg said.