The European Way

New York. 1 July, 2011.

Kicking cans are in fashion these days.
The Japanese started the trend two decades ago and many countries followed suit.
In the US, we upped the ante by kicking a six-pack down the road.
But today, the Europeans are no longer playing the same game.

The revolving currency crisis has put in motion a typical European reaction.
Mindful of social disruption, Europeans move slowly.
However they do not ignore the problems.
Europe is not Japan.

Remember Viscount Davignon, the pompous European Commissioner?
He lent his name to a plan dealing with the European coal and steel industries’ overcapacity in the 1970’s.
It was a compromise between financial and social cost.
The plan included massive public intervention and timid steps towards restructuring.
Gradual change was deemed preferable to a purely financial logic.

By the time Davignon’s successor took office, public opinion was ready for more reforms.
And a few years later came the coup de grace from a country outside the initial group of six.
The Iron Lady took the unions head on and did the unimaginable, including privatizations.
Other governments followed suit and the Dutch Hooghovens quickly became the example of successful reorganization and privatization.

Here is the European way:
Acknowledge the problem.
Use massive governmental intervention.
Slowly change course.
Keep at it until mentalities are ripe for change.
Once people have had time to adjust, final decisive decisions become evident and no longer controversial.
(Margaret Thatcher had a nasty habit of speeding up the process a bit).

Isn’t this what we are observing today?
The sovereign debt crisis was easy to acknowledge.
European heads of state got together and announced a massive bailout fund.
Greece, but also Ireland and Portugal, then worked out some fiscal plans.
Steps towards austerity were taken.
Then the bankers were told to take “voluntary” measures.
French and German banks quickly agreed to rolling over some of the Greek debt.
No doubt, they will have to write down large chunks of their portfolios as well.
But just not yet.

These are the first steps toward the necessary adjustments.
In due course, Greeks will pay taxes.
Banks will restructure the debt.
By then, the world will have moved on.
These measures, so difficult to implement today, will generate a big yawn.

In the meantime, more trouble can be expected.
If the Greeks get to roll over their debt, no doubt the Irish and the Portuguese will ask for similar treatment.
This will inevitably spook the markets.
Then, the eurocrats will organize other bailouts/Brady bonds.
Markets will be surprised and new relief rallies will be de rigueur.

Happy Fourth of July.

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