Investment Contrarians

New Cracks Appear in Europe’s Economy

By for Investment Contrarians |

New Cracks Appear in Europe’s EconomyThere are many players in the eurozone placing large bets on the union and the euro surviving. Not only are massive sums of money being used to try and reduce the financial crisis, but many businesses would be hurt at least in the short term if the euro were to break apart. While it may seem that the financial crisis is averted based on the recent announcement by the European Central Bank (ECB) of additional monetary support, I would say it’s been postponed at best.

The first sign is that there is currently a large amount of money leaving the poorer, troubled nations and being moved up into the stronger members of the eurozone. This flight of capital can certainly accelerate any financial crisis, especially one so close to the edge. According to data from Bloomberg, approximately $425 billion (326 billion euros) left Spain, Greece, Ireland, and Portugal in the past fiscal year, ended July 31. Bloomberg also states that approximately 300 billion euros moved into the economies of the seven core members of the eurozone, including Germany.

While the eurozone is supposed to be “one” economic block, it’s obviously becoming increasingly fragmented. This type of distortion will certainly lead to greater difficulty in trying to prevent a financial crisis from erupting. As many monetary policies enacted by the ECB affect all eurozone members, having such massive differences economically and financially makes it extremely hard to zero in on the core issues.

For example, if we look at current monetary policies, can we really state that one interest rate is appropriate for both Germany and Spain? It seems silly to say so, as there are large impediments to full integration. While over the short term, Spain will most likely receive a new bailout and avert a financial crisis, over the next couple of months, questions still arise regarding the long-term viability of the eurozone.

Has anything really changed structurally? I would say no. Yes, a lifeline has been handed out, but there are significant hurdles for the eurozone to survive, especially with the massive flow of funds that we’re currently witnessing. One would think that greater integration between the eurozone members is critical for this union to work. I would agree with that notion; however, while the leaders may talk about such a course of action, the people seem to be of a different opinion.

Just recently, the people and political parties of Catalonia, a part of Spain, are now examining how to legally secede from the country. They want control over their revenue, as that region is an overall net contributor to the country. With unemployment sky-high and the financial crisis close to erupting, this is obviously causing a lot of tension, and local politicians are now using this to their advantage. They’re not the only region looking to secede, as growing voices are once again coming from northern Italy, where the Lega Nord is calling to form their own country.

My question is: if greater integration is key to keeping the eurozone together, how likely is this to happen when individual countries can’t stay together? I see a tremendous amount of turmoil ahead for the eurozone, and while these latest bailouts might avert a financial crisis over the short term, I think there’s far greater pain ahead.

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