by Macro Story
I’m traveling this week and posts will be lighter than normal. Below is a
guest post from a reader sharing some insights to the ways of the European
markets.
To understand and appreciate the
severity of the current European debit crisis, it is imperative to dig deeper
into the history of the Euro, the history of the social benefits in Europe, what
the common average European person feels about their entitlements and where
their current economics are leading them to.
The deficit crisis that threatens the Euro has also undermined the sustainability of the European standard of social welfare, built by left-leaning governments since the end of World War II. European governments with big budgets, falling tax revenues and aging populations are experiencing rising deficits, with more bad news ahead.
With low growth, low birthrates and longer life expectancies, Europe can no longer afford its comfortable lifestyle, at least not without a period of austerity and significant changes. If we look at the Italian life style as an example, you will see that 85% of the younger Italian generations have decreased the birth rate of the general Italian population by electing to have 1 or 2 children at best fearing economic un-sustainability of their
future generations in comparison to their older generations in the early 19th century.
The deficit crisis that threatens the Euro has also undermined the sustainability of the European standard of social welfare, built by left-leaning governments since the end of World War II. European governments with big budgets, falling tax revenues and aging populations are experiencing rising deficits, with more bad news ahead.
With low growth, low birthrates and longer life expectancies, Europe can no longer afford its comfortable lifestyle, at least not without a period of austerity and significant changes. If we look at the Italian life style as an example, you will see that 85% of the younger Italian generations have decreased the birth rate of the general Italian population by electing to have 1 or 2 children at best fearing economic un-sustainability of their
future generations in comparison to their older generations in the early 19th century.
Europe’s population is aging quickly as birthrates decline. Unemployment has
risen as traditional industries have shifted to Asia. The region lacks
competitiveness in world markets. According to the European Commission; by 2050
the percentage of Europeans older than 65 will nearly double. In the 1950s there
were seven workers for every retiree, by 2050, the ratio in the European Union
will drop to 1.3 to 1.
The reaction so far to the southern European governments’ efforts to cut spending has been pessimism and anger, with an understanding that the current system is unsustainable. The younger generations of southern Europeans paying high taxes to finance bloated state sector and its employees resent that and they feel that state employees sit there for years drinking coffee and chatting on the telephone and then retire at age 50 ( In Greece ) with nice fat pensions.
The reaction so far to the southern European governments’ efforts to cut spending has been pessimism and anger, with an understanding that the current system is unsustainable. The younger generations of southern Europeans paying high taxes to finance bloated state sector and its employees resent that and they feel that state employees sit there for years drinking coffee and chatting on the telephone and then retire at age 50 ( In Greece ) with nice fat pensions.
Most young southern Europeans believe that their high ranking politicians
within their governments have pocketed Billions of Euros for their special
interest groups and shady business government deals and thus resent paying any
higher taxes to bailout their corrupted officials who have created these
financial entanglements on their own. The level of governments’ corruptions
inEurope has been very high within the last 2 decades and many people as they
resent it; they feel powerless in addressing it legally within their
courts.
Middle age Italians as an example are very pessimistic about their future pensions and feel that their country has no future. Figures show the severity of the problem. Gross public social expenditures in the European Union increased from 16 percent of gross domestic product in 1980 to 21 percent in 2005, compared with 15.9 percent in the United States. In France, the figure now is over 31 percent, the highest in Europe, with state pensions making up more than 44 percent of the total and 30 percent for health care.
The challenge is particularly daunting in France, which has done less to reduce the state’s obligations than some of its neighbors. In Sweden and Switzerland, 7 of 10 people work past the age of 50. In France, only half do. While Germany has raised the retirement age to 67 for those born after 1963. The French state pension system today is running a deficit of over 11 billion Euros, or about $13.8 billion; by 2050, it will be 103 billion Euros, or $129.5 billion, about 2.6 percent of projected economic output.
Until the Euro was adopted in 1999, southern European countries would let their national currencies gradually fall in value against the German mark and other currencies of richer nations. That boosted exports and tax revenues, but the pensions paid by Portugal, Greece and others became worth less if spent in Germany and other northern jurisdictions. Conversely, these Mediterranean states became great places for Americans and northern Europeans to vacation and retire.
After 1999, national governments in Spain, Portugal and Greece, and to a lesser extent more prosperous Italy, faced the difficult prospect of telling their citizens they could not retire as young, enjoy the same health benefits or employment security as the wealthier French, Germans and Dutch. Instead, these governments borrowed heavily and now face severe retrenchment and perhaps eventual bankruptcy.
Middle age Italians as an example are very pessimistic about their future pensions and feel that their country has no future. Figures show the severity of the problem. Gross public social expenditures in the European Union increased from 16 percent of gross domestic product in 1980 to 21 percent in 2005, compared with 15.9 percent in the United States. In France, the figure now is over 31 percent, the highest in Europe, with state pensions making up more than 44 percent of the total and 30 percent for health care.
The challenge is particularly daunting in France, which has done less to reduce the state’s obligations than some of its neighbors. In Sweden and Switzerland, 7 of 10 people work past the age of 50. In France, only half do. While Germany has raised the retirement age to 67 for those born after 1963. The French state pension system today is running a deficit of over 11 billion Euros, or about $13.8 billion; by 2050, it will be 103 billion Euros, or $129.5 billion, about 2.6 percent of projected economic output.
Until the Euro was adopted in 1999, southern European countries would let their national currencies gradually fall in value against the German mark and other currencies of richer nations. That boosted exports and tax revenues, but the pensions paid by Portugal, Greece and others became worth less if spent in Germany and other northern jurisdictions. Conversely, these Mediterranean states became great places for Americans and northern Europeans to vacation and retire.
After 1999, national governments in Spain, Portugal and Greece, and to a lesser extent more prosperous Italy, faced the difficult prospect of telling their citizens they could not retire as young, enjoy the same health benefits or employment security as the wealthier French, Germans and Dutch. Instead, these governments borrowed heavily and now face severe retrenchment and perhaps eventual bankruptcy.
The austerity Germany and others will compel to bail out these floundering
southern European governments will shatter the myth that the welfare state can
be provided equally across Europe, or these southern states will simply quit the
Euro and take with them the Franco-German dream of European Unity.
For the last several months these harsh realities of possible defaults have been felt more severely within the southern European countries. The younger generations are facing a battle against their governments that are enforcing austerity measures while their parents’ generation have enjoyed full social liberal benefits, these young people can not understand the sudden abruption of their benefits and thus are taking their claims out to the streets and protesting against what they call corrupted politicians who have stole their future benefits to pay as a high tax to satisfy the Germans hard working life style.
As to the older and senior generations of the European population, they are divided into 2 main schools of thoughts. The much older generation that are over the age of 80 are not very concerned of the current crisis, they are physically weak to fight any changes and their life expectancies will not be affected by any changes in the near term. The other group between the ages of 60 – 80 has just started to feel the crunch of such crisis. As most of them are still in their early retirements, many have been reluctant to protect their financial assets in case of another financial collapse in Europe. They feel that any possible events may not be worse than what was seen 3 years ago.
For the last several months these harsh realities of possible defaults have been felt more severely within the southern European countries. The younger generations are facing a battle against their governments that are enforcing austerity measures while their parents’ generation have enjoyed full social liberal benefits, these young people can not understand the sudden abruption of their benefits and thus are taking their claims out to the streets and protesting against what they call corrupted politicians who have stole their future benefits to pay as a high tax to satisfy the Germans hard working life style.
As to the older and senior generations of the European population, they are divided into 2 main schools of thoughts. The much older generation that are over the age of 80 are not very concerned of the current crisis, they are physically weak to fight any changes and their life expectancies will not be affected by any changes in the near term. The other group between the ages of 60 – 80 has just started to feel the crunch of such crisis. As most of them are still in their early retirements, many have been reluctant to protect their financial assets in case of another financial collapse in Europe. They feel that any possible events may not be worse than what was seen 3 years ago.
However, within the last 3 months many have started to act by withdrawing
their savings out of the big banks and seeking safe deposit boxes and other
means to protect their cash, fearing another banking system collapse. The recent
call of solidarity between several global central banks to sure up dollar
funding liquidity for European banks is a red alarm and an interpretation of
lack of depositaries reserves for some of the largest European banks as many
people will continue to withdraw their entire savings accounts; mostly done by
the senior populations between the ages of 60 – 80 to protect what they have
left in savings in case their governments can not provide for their social
benefits moving forward.
The fact that the southern European populations are dominated by the older
age groups, an increase in sudden wave of bank depositary withdrawals in case of
more alarming economic news such as a default will create an overnight liquidity
crunch and credit lock up in the entire European banking system. The cultural
aspect of such population to act in this manner is not out of the roam of
possibilities if the headlines started to become more fearsome and economically
damaging. That is one of the main reasons why the European politicians will not
fear any criminal prosecutions if they make false public statements, rumors or
intentional public lies to sooth and calm their anxious aging populations who
may not hesitate to make a run on their banks. Unfortunately, this cycle will
negatively feed on itself once it starts.
There is a complete state of confusion between all ages and all sectors of the southern Europeans regarding what their politicians are voicing within the public arena regarding their debt crisis.
Most Europeans believe that their politicians will utter any statements in public even lies to help bolster their objectives. It is not uncommon to see many headlines cross the airwaves, print media and online that may not be true, perhaps rumors or even flat out lies just to either falsely deny the reality, create misconceptions, or even to calm the masses hoping for lesser protests in the coming weeks. The southern European governments are aware of the truth and perhaps the true causes of their fiscal deficits, yet they are trapped at this point between a non-credibility within an angry young populations and the anger of the German population who have felt that their hard working tax revenues are wastefully being spent on guaranteeing pensions for their floundering southern neighbors.
The fate of the Euro is true financial misfortune that is unavoidable at this time. This experiment was meant to fail from the start, and unfortunately it will drag the entire western world economies along for the ride. The course of this experimental journey is coming to an end regardless of what the European governments are trying to muster up in the interim at this time. Any moves or tactics will be temporary band aids and will not address the social complexity that caused these social entitlements mounting debts; the depth of the debt problem is deeper than any liquidity issues or just bailing out failing banks. The cost of such crisis is in the trillions of Euros and this has been accumulating over the last 11 years since the inception of the Euro currency.
There is a complete state of confusion between all ages and all sectors of the southern Europeans regarding what their politicians are voicing within the public arena regarding their debt crisis.
Most Europeans believe that their politicians will utter any statements in public even lies to help bolster their objectives. It is not uncommon to see many headlines cross the airwaves, print media and online that may not be true, perhaps rumors or even flat out lies just to either falsely deny the reality, create misconceptions, or even to calm the masses hoping for lesser protests in the coming weeks. The southern European governments are aware of the truth and perhaps the true causes of their fiscal deficits, yet they are trapped at this point between a non-credibility within an angry young populations and the anger of the German population who have felt that their hard working tax revenues are wastefully being spent on guaranteeing pensions for their floundering southern neighbors.
The fate of the Euro is true financial misfortune that is unavoidable at this time. This experiment was meant to fail from the start, and unfortunately it will drag the entire western world economies along for the ride. The course of this experimental journey is coming to an end regardless of what the European governments are trying to muster up in the interim at this time. Any moves or tactics will be temporary band aids and will not address the social complexity that caused these social entitlements mounting debts; the depth of the debt problem is deeper than any liquidity issues or just bailing out failing banks. The cost of such crisis is in the trillions of Euros and this has been accumulating over the last 11 years since the inception of the Euro currency.
Therefore, when the US Treasury Secretary tries to assure the media by saying
that we will not have another Leman’s collapse, tragically and ironically he is
correct, the collapse that is anticipated is much worse and much bigger than 10
Leman’s events put together, only if he or others are willing to admit to this
reality.
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