Comprehending the EU Debt

The Current Dilemma

Greece continues its attempts at restructuring with civil unrest, Spain’s unemployment continues to rise to unprecedented levels, and France is straining under labor unrest. An example of the struggle to squeeze every source for more revenue is a proposal in Hungary late last year

Hungary solicits the Chinese?
European Union member Hungary’s legislators proposed the introduction of a passport aimed at well-heeled foreign investors. Proposed legislation listed on parliament’s web site would grant permanent residency and in due course Hungarian citizenship to foreigners who buy at least 250,000 euros worth of government bonds.

Hungary’s billions of euros worth of foreign currency debt maturing in the next few years has resulted in novel approaches by lawmakers to raise currency and deal with the problem. The move to grant citizenship based on investing in Hungarian bonds, is backed by the ruling government party, and is designed to attract new investors.

The proposed legislation calls for the debt management office to issue special “residency bonds” to foreigners. Holders of at least a quarter of a million euros’ worth of the paper would get preferential immigration treatment. One of the authors of the proposal said Chinese investors were specifically targeted.

Some Pundits Forecast European Disaster
Most commentators forecast that at a minimum, Greece and possibly other members will leave the EU, and what is more likely is that the European Union itself will self-destruct because of the debt levels. Some say the only solution is a true economic union, which was the eventual goal in any case when the EU was first conceptualized.

Most commentators feel that the outcome of any of the choices will be that the people of Europe face a serious recession, if not a depression, impacting global growth, and could plunge the world into the next fiscal crisis.

The Current Situation
In spite of continued warnings of impending collapse, somehow the world is continuing and Europe has not disintegrated. What a surprise!

Each of the EU members continues to struggle ahead, and mini-crisis after mini-crisis comes and goes, without larger consequences. The Europeans are taking a similar approach to the politicians in Washington, and elsewhere. Patience and steadfastness is the order of the day. Rather than taking irreversible actions, and crystallizing some consequence or another, the politicians are taking stopgap measure after stopgap measure. Holding the line, to coin a phrase, is the order of the day.

This is a reasonable policy and indeed the only possible policy under the circumstances. Each country got into this mess, by listening to special interest groups in that country who demanded benefits for themselves, and as government acquiesced to these demands, the debts of governments grew until they were no longer sustainable. Now the process has to reverse itself, and as the debts were built up over a long period of time, the debts must be reduced over a long period of time. As the economy naturally grows, the debts and deficit will gradually diminish in size and scope in comparison to the GDPs, until in years to come, the current problems will be a only a memory.

Economic Suffering Begets Politic Strife
This is a problem that can only be solved as spending abates in a fashion to prevent serious economic disruption, which would itself possibly erupt in forms of fascism, nazism and equally disgusting forms of political strife. Remember that the world endured two World Wars, and numerous lesser wars, because of economic disruption, fiery politicians who gained the support of the population, and attempts to gain military victory at the cost of millions of lives, and all caused by economic difficulties. There are already stirring of this type of fiery rhetoric in many countries. We would do well to heed these warnings.

Having learned a lesson from previous world wars, the USA assisted both Germany and Japan after the last world war to recover economically, and the results were peace, security, and a rising universal prosperity.

The Sheer Size of the European Union
The EU covers over 4 million km² and has 495 million inhabitants — the world’s third largest population after China and India. The economy of the European Union generates a GDP of over €12.629 trillion (US$17.578 trillion in 2011) according to the International Monetary Fund (IMF), making it the largest economy in the world. The EU countries represent approximately one fifth share of the entire Gross world product.

This is not some containable small economic force. This is a major part of the modern world.

Countries Requesting Entry into the EU
In North America, there is a misconception that the EU is struggling and withering, but the reality is that countries surrounding the EU, that are not full members of the EU, are requesting entry to the EU. These include Iceland, Croatia, Turkey, Macedonia, Montenegro, Serbia, Albania, Bosnia and others. This is not an organization that is withering and dying. This is a vibrant and growing entity, an entity that has economic troubles as does most of the rest of the world, but regardless the EU is one of the major economic powers in the world.

The EU does more than than bind countries economically. To be a member of the EU means that an applicant must meet demanding standards of political conduct, monetary conduct, fiscal conduct, rights conduct and much more.

The Future of the European Economic Union
There will be strains and disagreements. Countries will struggle and falter, but the EU will continue. Should any country foolishly attempt to leave the EU, the economic consequences of that departure would be far more dramatic than the cost to that country of reining in its profligate spending. There is no military means of forcing a country to maintain membership. This is not a forced political membership or an invasion by one country of another. This is a true economic union, with the elimination of political borders and economic barriers. Leaving the EU would mean an immediate and dramatic reduction of the standard of living within that country. The economic hardship would dwarf any current hardship.

This union is highly beneficial to all parties, and will continue regardless of the current economic strains and difficulties.

Investing
Investors would be best served by realizing the reality of the existence of the EU, and by ignoring the media and pundits who falsely prophecy the disintegration of the EU. The solution to the EU fiscal problem, is not an immediate ‘cut off your nose to spite your face’. Rather it is a combination of a fiscal helping hand together with an iron determination to ensure that all members impose fiscal responsibility upon their actions, and this is precisely what is occurring.

The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.