Let it not be said that we haven't been warned. Europe is in dire trouble on a number of levels.....and that ignores the possible disintegration of the European Union. There is a more basic "fight" underway where certain countries, such as Greece and Spain, should go down along the path of austerity across the board.
Spiegel On Line International has a sobering piece "This Time, Europe Really Is on the Brink". As the piece points out, we ignore history at our peril."What is the situation today? Europe's periphery is in depression. According to the IMF, gross domestic product will contract this year by 4.7 percent in Greece and 3.3 percent in Portugal. Unemployment is 24 percent in Spain, 22 percent in Greece and 15 percent in Portugal. Public debt already exceeds 100 percent of GDP in Greece, Ireland, Italy and Portugal. These countries, along with Spain, are now effectively shut out of the bond market.
Now comes the banking crisis. We have warned for more than three years that continental Europe needed to clean up its banks' woeful balance sheets. Next to nothing was done. In the meanwhile, a silent run on the banks of the euro zone periphery has been underway for two years now: cross-border, interbank and wholesale funding has rolled off and been substituted with ECB financing; and "smart money" -- large uninsured deposits of high net worth individuals -- has quietly exited Greek and other "Club Med" banks.
But now the public is finally losing faith and the silent run may spread to smaller insured deposits. Indeed, if Greece were to exit, a deposit freeze would occur and euro deposits would be converted into new drachmas: so a euro in a Greek bank really is not equivalent to a euro in a German bank. Greeks have withdrawn more than €700 million ($875 million) from their banks in the past month.
More worryingly, there was also a surge of withdrawals from some Spanish banks last month. On a recent visit to Barcelona, one of us was repeatedly asked if it was safe to leave money in a Spanish bank. This kind of process is potentially explosive. What today is a leisurely "bank jog" could easily become a sprint for the exits. Indeed, a full run on other PIIGS banks would be impossible to avoid in the event of a Greek exit. Rational people would ask: Who is next?
In the meantime, the credit crunch in the euro-zone banks on the periphery remains severe as banks -- unable to achieve the new 9 percent capital targets by raising private capital -- are selling assets and contracting credit, thus making the euro-zone recession more severe. Fragmentation and balkanization of banking in the euro zone, together with domestication of public debt, is now well underway.
The process of political fragmentation is also speeding up. In the last Greek elections, seven in 10 voters cast their ballots for smaller parties opposed to the austerity program imposed on Greece in return for two EU-led bailouts. Established parties are also losing out to splinter parties in Italy, where the comedian Beppe Grillo's Five Star Movement has just won control of the city of Parma, and in Germany, where a maverick party called the Pirates is all the rage. Less frivolous populists now have substantial support in France, the Netherlands and Norway. This trend is ominous."