European situation does matter to US

By DAVID MOON, Moon Capital Management, LLC
November 6, 2011

Other than its impact on day-to-day swings in US stock prices, does it really matter what happens to Greek debt and to the rest of Europe?

Absolutely.

I first wrote about this a year-and-a-half ago. Since then, European officials have crafted four bailout plans, three of them this year.

The most recent plan has its problems. The bailout fund it would create might not be large enough to fully address the Greek problem. It is certainly not large enough to also bail out Spain and Italy.

Although deficient, the plan looked like it would appease investors for a while – that is, until Greek Prime Minister George Papandreou announced he was unwilling to agree to certain cuts in government expenditures in exchange for a bailout of their debt. Instead, he is going to let the country’s voters decide the issue.

As Margaret Thatcher said, “consensus is the absence of leadership.”

Hours after Papandreou announced his decision to hold a national referendum on the plan, his Finance Minister, Evangelos Venizelos, was hospitalized with stomach pains.

So was most of the world’s investment community.

If you think this global phenomenon is relatively recent and that the world’s economies are more interrelated today than 50 or 100 years ago, you’re wrong. They always have been deeply connected.

Until the 1930s, the term “the Great Depression” referred to the worldwide economy from 1871 to 1879. There were massive bank failures. Unemployment was three times today’s stubborn nine percent level.

Conditions were made worse by retributive worldwide protectionist policies. A quarter of the US railroads eventually went bankrupt.

That’s akin to 25 percent of today’s telecommunications, computer and internet companies failing.

All of this began with a drop in the demand for gold. In Germany.

In 1814, Thomas Jefferson wrote that “it cannot be to our interest that Europe should be reduced to a single monarchy.” Yet the creation of the European Union (EU) in 1993 was a very strong step in that direction. Rather than spreading the strength of the healthiest members among the weaker sisters, the reverse has predictably happened.

The least fiscally sound of the 27 EU countries have little incentive to change their ways as long as it appears there is little consequence for their monetary malfeasance.

And as long as Germany, Great Britain, et al. and ultimately, the United States, fear a Greek default on their debt, our leaders are likely to continue to concede to Greek threats.

The problem is that the European bailout plans have aimed at bailing out an insolvent government. If healthy economies are going to support any governments, it should be those that are struggling, but solvent. Like Lehman, Greece should be allowed to fail.

Instead, the EU seems committed on following the US model with AIG: save it at all cost. If they do, they will end up with the equivalent of Fannie Mae and Freddie Mac on their hands: an endless money pit that will consume every dollar that comes near it.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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