I would be remiss if I did not mention Europe here, if only to say that last week’s pronouncements are nothing but “hot air,” befitting the sweltering temperatures we are experiencing. The biggest failing of the current plan is that Spain’s banking problem is much more than the roughly $100 billion mess EU leaders discuss in public. Spain will likely need four times that or more to keep its banks from collapsing into the abyss.
In order to keep this discussion brief, I will just cut to the chase and say that the Eurozone can remain in its current format only if German taxpayers are willing to foot an enormous bill. Of course, I am not even sure the German economy is big enough to carry that weight. I suspect the next grand scheme will be an effort to lever current rescue funds in the ESM and EFSF through the creation of a bank, which could then buy the bonds of Spain and Italy in the open market to avoid a meltdown in the near term. Yes, another Ponzi scheme. That plan would not fix things either because the basic European problem is too much sovereign debt and uncompetitive economies in the south. Debt restructuring and write-downs are the only answer, along with real productivity reforms in places like Spain and Italy.
Scott Brown, July 2, 2012