[This blog was originally published by Summitas at www.Summitas.com]
The standard narrative for the Eurozone crisis goes something like this: The hard-working, disciplined, highly skilled folks in Germany are being asked to bail out the profligate, lazy wastrels in Southern Europe who have fiddled for years instead of getting their acts together. If Germany does in fact bail them out, it will simply be rewarding bad behavior and ensuring that there will be a lot more of it in the future.
There’s some truth to this, of course. But there’s another, very different way of looking at the European crisis: as a battle between “users versus dealers.” Think about it like this.
America has a drug problem, as we all know. Millions of Americans are addicted to hard drugs, prescription drugs, painkillers, even some over-the-counter drugs. Most of us have a low opinion of drug users, but we also have a bit of the “there but for the grace of God” attitude about them. Medical scientists tell us that there are additive personalities, people who are much more likely to become addicted than other people. Probably, under certain circumstances, most of us could find ourselves addicted to one drug or another.
So while we have a dim opinion of drug users, we reserve our most serious contempt for drug dealers, the folks who pray on the users. Drug dealers make vast sums of money off the misery of others, and if all the dealers disappeared from the face of the earth tomorrow, few of us would shed a tear.
In that context, let’s look at the situation in Europe. When the European Union was organized and various countries were admitted over time, every country in the Union found that it could borrow money at the rate of the most creditworthy countries. So instead of paying, say, 5%, countries like Greece, Portugal, Ireland, Italy and Spain paid the same rate as Germany.
In the real world, this can’t happen. Nobody is going to lend money to a dysfunctional country like Greece at the same rate as they will lend to Germany. Thus, a serious problem with the European Union from the beginning was the failure of the Union’s founders to deal with this issue.
And it was a very serious issue, because cheap money acts on the culture of a country exactly like a drug works on the human body – it’s addicting. Consider the case of the United States, where sovereign debt has reached 95% of GDP – well above that of Portugal and a level that would make most nations blush.
Instead of building a disciplined, highly skilled workforce (like Germany), the European periphery was encouraged to believe that it could continue its old, inefficient ways but still enjoy the benefits Germany was getting. And it was encouraged in this belief mainly by Germany itself, which studiously looked the other way as countries like Greece lied about their budgetary issues for years.
Now, suddenly, Greece has become international laughingstock because it partied for a decade and has finally hit the wall. What were they thinking, we ask? Maybe Greece deserves our low opinion of them, but the reality is that the Greeks will now face many years – probably decades – of serious hardship before they work their way back to sobriety.
Meanwhile, what about the “dealers?” Germany didn’t lend its creditworthy balance sheet to the rest of the European Union out of the kindness of its heart. No, what Germany wanted was markets for its goods. Germany isn’t a consumer economy like most of the rest of Europe (and like the US) – it’s an export economy. Germany’s overall economy is a fraction the size of America’s – $3 trillion versus $15 trillion – but it’s the second largest exporting country in the world, behind China and ahead of the US. By encouraging the rest of Europe to spend well beyond its means – using the “drug” of cheap borrowing – Germany became rich and powerful.
Notice that by reserving our scorn for the likes of Greece, instead of for the likes of Germany, we are contributing to European deadlock. Greece and its fellow partiers can’t solve their problems on their own, and Germany has little incentive to help out as long as we all think the Germans hold the moral high ground. When political leaders in Germany vow that they will never “bail out” profligate countries like Greece, we nod in agreement. But maybe we should be outraged. “You’re the drug dealer here,” we should be saying. “You’re the one who provided the cheap drugs, you’re the one who prospered mightily while encouraging other countries to spend themselves into penury. You damn well should help bail them out.”
No, we shouldn’t apologize for Greece, any more than we would apologize for drug users anywhere. But maybe, just maybe, we should reserve our greatest scorn for the drug dealers of the world – including Germany.
Please note that this article is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.