Is the European Sovereign Debt Crisis Behind Us?

The multi-trillion dollar question of the moment: is the European sovereign debt crisis behind us?  My answer is, unfortunately, no.

What I feel positive about:

• The crisis finally has the attention of much of the financial world and many of the First World’s governments.  This is distinctly different than the situation that has come before now.  Before now the Europeans tried to sweep this problem under the rug by issuing hollow affirmations similar in potency to those issued by serial-dieters.  Additionally, many investors the world around were either lazy or sloppy in exploring the crannies of the European debt attic.  But, just like heart disease brought on by obesity, bloated debt and budgetary problems don’t just go away.
• As I blogged about recently, the Europeans are finally talking about the right amount of cash necessary to end this crisis: $2 trillion.
• Various European parliaments have approved the continued existence and expansion of the EFSF – the bailout slush fund.
• Meaningful dialogue is taking place about whether or not to kick Greece out of the EU.  This is important because Greece has admitted to lying its way into the European Union.  It’s hard to keep the peace when other members of the EU have met stringent entrance requirements and one of them has not.  And not only has Greece not met the entrance requirements and then lied about it, they also are the most indebted nation asking every other member, the European banking community, and the rest of the world to bail them out.
• The Europeans are finally crossing their t’s and dotting their i’s.  That is, they are finally dealing with many of the retarded omissions in the treaty that created the European Union.  An example of an omission is how do you kick a member out that lied its way in?  Another: without the ability to kick out a member, how do you enforce the ongoing annual stringent economic requirements that must be met to remain a member of the EU?

What I don’t feel positive about:

• It’s $2 trillion!  That’s double that of the U.S. mortgage crisis of 2008-2009!
• Europe’s banks are all invested in Europe’s nations’ sovereign debts.  If one nation declares bankruptcy it could set off a chain reaction of bank failures and then sovereign debt failures.
• From where is all of the money coming?  In my opinion the cascading financial crises around the world all have the same source: too much debt.  How was it possible to issue so much debt in the first place?  Again, in my opinion, it’s from monetary policy the world around that was way too loose.  That is, interest rates, starting in the mid-1990s were kept much too low.  When the price of money, interest rates, is too low people like to borrow.  But unfortunately, the solutions that are being proposed all involve some form of issuing more debt or in keeping interest rates low.
• There still is not walk to the European talk.  As I said in the linked post above, the Europeans are finally talking about the right amounts of money, $2 trillion.  But the EFSF is going to be funded at about $600 billion, that’s 1,400 billion dollars short.  To my mind this is a massive, massive issue.  Where does one just suddenly discover $1.4 trillion?
• How do you convince nations that are a part of an economic club to bail one another out to the tune of $1.4 trillion?  At a certain level the nations of Europe are still competitors at the economic level.  How can citizens of Germany be asked to bail out the citizens of Portugal?  Even as generous as I consider myself to be, I would have a hard time having my taxes raised to pay for a bailout in Mexico (remember we are tied to them through NAFTA).
• Issues about the EU and its continued existence still have not been resolved.

All of the negatives listed above create tremendous uncertainty.  That leads to volatility.  And those negatives lead me to conclude that, despite the uplift in share prices recently based on the right kind of Euro-talk, the European debt crisis is going to continue.  Not only will it continue, it will likely get more complex.  That complexity will be of a kind to create more uncertainty and likely more volatility.  So I don’t think that the European sovereign debt crisis is behind us, not even close.

Jason