I’ve touched on the volatile and worrying fragility of European markets in the past, pointing out what the dire implications might be for U.S. and global markets when the bill on Europe’s borrowing exuberance comes due. Anyone that has been paying attention to the headlines over the past few months probably wouldn’t be surprised to hear that, if anything, my concern is only increasing.
Greece and Cyprus remain in critical condition and on what is essentially economic life support, Ukraine and Turkey have experienced significant civil unrest, and all of this is happening in a region that remains burdened by some seemingly intractable structural imbalances. German Chancellor Angela Merkel recently pointed out that Europe has 7% of the world’s population, 25% of its output, and 50% of its social spending. That is not a recipe for long-term success. Remember: we are all connected. Any time there is turmoil—military, political, economic—in such a significant and influential part of the world—we’re all affected.
It’s amazing to think about, but the failure of a bank in Cyprus could potentially take down U.S. markets. I think this all goes back to the origins of the Euro itself, which gave countries like Greece, Spain and Italy the borrowing power of Germany. This enabled them to incur more debt than they should have been allowed to—and these same countries are dragging all of Europe down.
The creation of the Euro bound these economies together, but did not centralize fiscal decision-making enough to make the framework feasible for the long-haul. This underlying dysfunction is one of the reasons why the Eurozone crisis has taken longer to resolve than anyone expected, and why the likelihood of a major global-market-rattling default in a country like Italy or France is continuing to rise.