European leaders are quickly falling behind the curve as European citizens increasingly recognize that austerity is not solving their problems. The single currency system remains deeply flawed and all attempts to stabilize it thus far have been nothing more than swift kicks of the can. I’ve maintained that that can kicking can only last as long as the citizens of these nations remain ignorant of their reality – that they are suffering at the hands of austerity in order to ensure that bankers do not suffer.
In a worrisome turn of events over the weekend the Washington Post is reporting a return of the mass protests in Europe:
“ATHENS, Greece — About 30,000 people protested in Athens’ central Syntagma square on Sunday evening against the government’s tough economic austerity policies.
The demonstration, larger than many others that have taken place during Greece’s economic crisis, appeared to be the first that resulted from spontaneous calls over social media sites such as Facebook. Many others have been organized by unions or political factions.”
The biggest risk in Europe is not that Greece or any other nation will default. It is that the citizens will wake up to flaws of the single currency system and demand a complete reversal of the current course. That could result in defection from the Euro and a complete unraveling of the periphery nations. European leaders must stop focusing on ways to restructure debt and kick the can. Make no mistake – restructuring Greek debt, though necessary, will not fix the Greek economy and it will not stop the austerity that is causing this unrest. More importantly, none of the solutions that have been conceived thus far come close to fixing the inherent flaws in this single currency system.
Interestingly, there is a great lesson from the credit crisis that all leaders should heed. In America, we have a structural problem. We are a nation that has become dominated by financial interests and the result is a deeply indebted private sector that now relies on the aid of its government or its local banker to achieve growth. The American financial crisis was the markets way of telling the country to fix this structural flaw in the system. When we bailed out our banks we were openly saying that the markets were wrong. The response to the crisis has not been one of admittal. Instead, it has been one of denial.
We made a distastrous tactical error when we decided to choose the interests of the bankers over the people. Europe does not have to take that same route. We have not admitted that the system is flawed and in dire need of restructuring. And the result is that the world’s largest economy has an economic “recovery” with a laughable 9% unemployment rate and an economic strategy that is based on the same gimmicks that helped cause the crisis. Europe needs to recognize what the markets are telling these leaders that there is a structural flaw at work here. And it needs to be fixed. They cannot circumvent it with bank bailouts and can kicking strategies as the American policymakers attempted to achieve. If they do, these problems will merely present themselves at some later course in the same disastrous form.
They must find ways to make this single currency system sustainable for the long-run. And that might even involve (gasp!) haircuts for banks. Ultimately, there is only one true way to make this currency system viable and that involves the creation of a central treasury and greater political unity. We’re reaching a point where Europeans need to decide that they are either in this together or not. And the citizens are growing increasingly impatient watching their leaders try to patch together a system that clearly has inherent flaws as is currently constructed.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.