Europe still failing to address the Real Problem

There has been increased buzz over the Euro zone over the course of of the last couple of days as central banker and lenders meet to try to come to some form of Agreement on a bailout mechanism for troubled/indebted Eurozone nations. All previous mechanisms put in place have failed to stem the slide of the region’s common currency. Yesterday’s successful bond auctions should not be confused with any thought that conditions have improved over in Euro-land given that the cost of insuring troubled debt actually rose.

The International Monetary Fund is talking about boosting its reserve fund to 1 trillion dollars and has asked the United Kingdom to help out but contributing 19 billion to the fund. England says it will only add more if troubled Euro nations can get their houses in order and agree to more reforms. The focus has shifted in my view to trying to save the currency and not the countries within it. This is a bad move. A little short term pain for the currency in my opinion might be what is needed for the sake of salvaging the single currency experiment. However, in this word of window dressing and ensuring that things appear better than they are, the focus has shifted to how the markets perceive the values of currencies and stock markets. Essentially, even though it’s crap, those in charge want to wrap up that crap and make it look better than it really is.

Let’s assess it though from a realistic view. We have had numerous “bailouts” so far since the Greek crisis hit and then morphed into a Euro-wide problem. Using different mechanisms and bailout vehicles, we have been told that measures were put in place to stem the risk of default. Let’s be honest to ourselves and admit that none of these rescue mechanisms have worked and none appear to stand a chance at working because none of them tackle the real underlying problem; the fiscal mismanagement and the rot within the affected governments. None of the bailout measures actually tackle fiscal reform but instead, they are all designed to simply throw good money after bad. It is because of that fact that any additional measures will be destined to fail. We can increase the size of bailout funds to infinity but we will always face the same problems so long as the policies in place that allowed for this to happen remain in place, the problems will never be solved.

Sure the Euro currency itself is looking for anything it can hold on to in order to attempt a rally. The short interest is so high on the Euro that any news perceived as “maybe good” will cause short covering. This is not to be mistaken for any thought that the problems are indeed solved. The Eurozone is truly struggling at the moment to stem the heightening risk for contagion. Rumours were abound last week about imminent government downgrades. We don’t get this in an improving environment. Fitch Ratings warned Spain, Italy, Ireland, Cyprus, Belgium and Slovenia may face another round of rating downgrades because as I noted above, the region is failing to carve out any real solution to the problem. Throwing money at it is not solving the problem. Even the World Bank lowered their forecast for European growth for 2012 suggesting that the region’s economy might actually contract by 0.3% this year.

Talks are currently underway to try to put together a second bailout package for Greece notwithstanding the fact that they have failed to implement any tangible policy reforms. This fact, and the fact that other European nations are more content with finding money rather than tackling their policies doesn’t instil much confidence in me that they will figure out the solution anytime soon. For these reasons alone, any excitement in the Euro should be tempered.