Europe’s leaders are meeting at a summit tomorrow in Brussels. Greece and the Fiscal Compact will be at the top of the agenda as the union continues to face crisis over the state of their single currency. As we head for yet another attempted solution to Europe’s problems we face a clear pattern. In dealing with Europe politicians, investors and the press are repeating a cysle. Though it seems we’ve progressed we are repeating the same events over and over again. 2012 is a carbon copy of 2011 and 2010.
We didn’t start hearing about the various European summits until 2010 when the debt crisis hit. Now they pop up intermittently to do one of two things. The summits either offer a patchwork solution to the problem or fails to come to conclusion. There are other events, such as political upheavals, that augment them in the repetition. The best way to understand the phenomenon is this chart from David Enhorn:
This demonstrates the effect of news from Europe on the financial markets. Tomorrow we’re heading again for the summit phase. In July of 2011 stocks rose after it was announced Greece was to get a second bailout to stave off its debt crisis. The deal also included a partial default in the form of restructuring. Everything was fine and the problem was solved. All anybody had to do was wait for the deal to take hold and fix all of Europe’s problems.
Just two months later at the end of September markets went into chaos after it was clear the solution to Greece’s problems hadn’t work. The biggest fall was called by a political rather than an economic movement. Greece’s Prime Minister announced that the country would have a vote on the bailout deal. The Greek people are naturally frustrated with the austerity package that has been imposed and the high unemployment rate in the country. Autumn of 2011 was a renewed crisis or in Einhorn’s chart the “Crisis Deepens” stage.
Below are some charts:
After that came a stage not mentioned in Einhorn’s chart. The stage, which takes place between many of the given periods is one of ignorance. If there has not been any major new information from Europe and no major political developments stocks can go up. This was the case at the end of the first quarter and the start of the second earlier this year. The market rallied as Euro fatigue set in and the news stories were simply not dramatic enough.
In early May we had a crash as investors started to see troubles arising in Europe on the back of elections in Greece and France. Those elections resulted in instability and dissidence respectively in the political establishments of the countries. France’s new president, Francois Hollande, is set to challenge the German status quo in Europe tomorrow on the subject of the Fiscal Compact. The treaty has not been ratified in many European countries and if Hollande gets his way it will have to be renegotiated.
The summit, depending on the outcome, could add to the Crisis Deepens portion of our cycle or might slip into the solution area. Greece still has no government and is still struggling to have its problems solved for it. A solution will be temporary if one is reached.
We are in a cycle of crisis. We are stuck in time. Europe has been in trouble for three years. The market has seen this not as a single event but as a series of small crises. This is what’s causing the relationship between Europe’s events and the market’s realities. A change in perspective would cause a more consistent depression in the market but also more consistent returns. This is not a problem of information or exogenous shocks. It is a problem in perspective.
Reliving the same period over and over again isn’t fun and it isn’t interesting. There are two major ways in which the repition can be resolved. The first is the change in perspective I’ve already discussed. The second is permanent resolution.
Resolution does not have to be positive. The euro needn’t be saved in order to break the cycle. Total collapse, though obviously the least preferred resolution, would stop the phenomenon. In terms of a positive solution there isn’t much on the table that could feasibly solve the problem permanently.
The most frequently cited solution is the removal of Greece from the Eurozone. This would divorce that country’s performance from the performance of the single currency. It is another temporary solution. Removing Greece leaves Ireland, Italy, Spain and Portugal in the Eurozone. Each of those countries comes with its own set of problems.
The most simple, best and most unlikely, given experience, solution would be Europe’s governments getting in line and reducing their debt independently. In this case Greece, and possibly other nations, might need a bailout but it would solve the crisis for good. At tomorrow’s summit this will not be announced. Tomorrow we”ll be told we’re repeating history once again.