Candid Europe

– I have great friends.   I guess maybe that comes with age.  But many of these folks have risen to positions in their careers which give them great views that not many of the rest of us are privileged to share.  

– Occasionally, they share the view from where they are with me.   And in this world of endless spin, I find this highly valuable.   

– Below, are a few paragraphs that a friend of mine, who works in a large international organization in Europe, wrote me.  

– I trust his intelligence, his candor and his proximity to the things he discusses.   In short, it’s a relatively clear view of something we would normally only see through a fog of spin and ideology.

– My friend shall remain nameless.  Enjoy.

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It is very interesting in Europe.  First, the European Union for the most part has control of the currency (the Euro) not all old member states are under the Euro, (Denmark, Sweden, UK), and the newer member states are not all in the Euro (Romania, Hungary, Bulgaria, Poland, Slovakia, Czech Republic, Estonia, Latvia, Lithuania).  So I think it is 13 European countries which are laboring under the Euro which includes France, Spain, Germany, Italy, Greece, Portugal, Belgium, Netherlands, Luxembourg, Cyprus, Finland, Slovenia, Ireland.  But, these for the most part are the economic dynamos.  I might not have the Euro members exactly correct, but it is close and off the top of my head.  Anyway, the main point is that the European Central Bank (ECB) does not act like our Federal Reserve.  The ECB is charged with keeping Inflation at or below 3% across the board.  It might be 2% but I think its 3.  So, when someplace like Spain gets a head of inflationary  steam, then the ECB would screw with interest rates and other controls to curb  this villain. This was a solution looking for a problem. This has been disruptive in some cases because if a smaller nation causes the ECB to react, it could really affect larger nations, like Germany, to enter an economic downturn where things were otherwise OK.

Overall this has more or less worked OK, but it really has not had to deal with a major economic problem like that which is coming.  If you will notice, the dollar is slowly strengthening against the Euro. This is because the European economy follows the US lead but it traditionally lags by 9 months to a year.  The UK seems to have a much shorter lag, and they are feeling the crunch now. Real Estate in Spain and France is in dire straights. Europe is beginning to head south at this time.  The ECB now has to make a decision about broadening its mandate. All bets are that it will reduce interest rates to stimulate the EU economy even though inflation is not where they want it. That in part is why the dollar is strengthening.  High interest rates attract capital which causes the currency to strengthen.  So if the ECB reduces or indicates lower interest rates, then the currency depreciates.

There are other problems also, no real wage growth for years, very high social programs which drain investment capital. None of this can hold because the Asian tigers are gobbling up everything in sight.  So what we have is a massive drain of capital (National Wealth) towards Asia.  Also, Asia is stealing all the intellectual capital. To me all of this means that at some point in time Europe and the US become has-been nations.

This issue with Russia is very interesting. It has revealed the real weakness in Europe’s ability to defend itself.  For years they have lived under the US umbrella which as you know can’t extend this far due to world wide commitments. The amount they (Europe at large) spend on national defense is very low.  They are not equipped to defend themselves at all. Our (USA) equipment is wearing out, our troops are tired, and our national will is spent.  Russia knows this and is taking full advantage. For some reason the Europeans are deluded into thinking it is really not a big deal.  Shades of Pre-WW II wishfull thinking.  They are also extremely dependent upon Russia for energy.  By taking Georgia, they [ Russia] have severely tightened the screws.

My overall assessment is that economically Europe is headed South.  This very well could cause a huge social upheaval.  We will just have to wait and see how deep this thing gets.

By the way I saw something yesterday about the number of Americans now in trouble with mortgages. It is about 10%.  The Fed is going to intervene in Fannie Mae and Freddie Mac.  I am afraid that I do not see any leadership coming that will deal with these issues.  Reminds me of the old Chinese curse “May you live in interesting times”. OR, can we say depression???

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