Mo’ money mo’ problems

Ireland:

Problem: Massive property bubble and inflation, citizens over-extended with debt and a government guarantee of bank deposits and debts which crippled the government’s finance requiring a bailout. Austerity measures implemented in order to comply with conditions of bailout crippling the economy.  Small businesses struggling due to lack of funding from a banking system that is now risk averse.  Property market is stagnant as NAMA controlling the supply/demand dynamics to try and manage an orderly price discovery mechanism.  Sale of core assets not in the long term interest of the country but required by the troika.

Solution: Either submit property market to natural market forces and allow for normal demand and supply conditions to occur. This should establish a floor in prices relatively quickly. This would require a painful deleveraging process for many but opportunities for others as seen in US. Alternatively reduce the supply side by using ghost estates or apartment buildings for governmental/ societal purposes- i.e remove them from the market altogether thereby creating a more balanced supply/ demand curve and potentially propping up prices in the rest of the market.  Introduce taxes on property to make it unattractive to property speculators. The property market should not be seen as an attractive place to make fast money from, couple this with an emphasis on individuals investing in themselves in education, higher training or start-up businesses creating an even more dynamic workforce and making Ireland more attractive as a place for investment.

Spain:

Problem: Similar to Ireland in massive property bubble which has burst but again being propped up by the regional banks which were poorly run in the first place. These banks are now controlling the property market as they have repossessed many of these ghost apartment blocks and encouraging individuals to buy them with steep discounts and 100% mortgages further perpetuating the problems. Couple this with a high unemployment rate (25%) which masks the black economy i.e the figure really isn’t as high as this as many work in café’s bars, restaurants in tourist zones for cash which lead to low taxation receipts for government.  This banking crisis has now been turned into a sovereign debt crisis as the govt feels they have to prop up the banks by borrowing money in the international debt markets at very high rates. They then lend that money to the banks to “protect” their balance sheet and thereby increasing the country’s debt enormously. This increase in their debt profile not only pushes their borrowing costs higher but also leads them closer to a bailout, which will need to be at least 5 times larger than the Irish bailout. Currently in a spiralling cycle of debt as government is borrowing long term money at high rates and lending to banks at low rates who in turn are buying government debt. In an ideal world this huge gamble would pay off with minor cost to the government as when things return to normal the banks would pay back the government through taxation of profits etc and the government would probably realise a net loss but not dramatic enough to wipe them out.  This is not an ideal world though and it’s akin to a blackjack player doubling his bets every time he loses

Solution: Tricky one and If I’m honest I think they should leave the Euro altogether, but let’s assume they don’t, they must start with taking the pain. Devalue the properties on the cajas books to near zero or cut them to investors for cut prices. This would cause immediate pain and stress on the banking system but one that can be overcome by guaranteeing ONLY deposits…not debts. Focus on collection of taxation receipts from small businesses. Do not sell their power assets to Chinese investors rather sell the product of their power assets to the Chinese.  Apart from that I cant see a way out for Spain without leaving the Euro – any ideas would be greatly appreciated.

Greece:

Problems: Where to start?! A massively corrupt legacy political system that focused on enriching themselves and borrowing money from EU to finance their country but forgetting to collect any taxation receipts to pay it off, taxation laws were designed to allow individuals to shirk their duty of paying taxes and politicians to exploit the system and enrich their own pockets.  Now stuck in a drastic situation whereby austerity measures are hurting an already weak and uncompetitive system as it was being artificially propped up by cheap money from EU. Political stalemate as well amongst warring parties has brought the country to it’s knees.

Solution: Leave the Euro. As the majority of the investment community believe Greece will leave the Euro they will not invest a penny until that happens as there is no point. Their investment dollars will go a whole hell of a lot further when in Drachma than it will in current situation. Every day that goes by makes the country more desperate and therefore more value to be obtained by waiting for an investor. Also any money that was in Greece is leaving rapidly as Greeks look to protect what is left of their wealth. Leave the Euro and start again. You could say this will cause more pain but I can’t see what staying will achieve for them, a slow drip towards eventual death or a short sharp pain with potential for a cure? I know which I would prefer. Greece has a robust tourist economy and shipping industry to start the rebuilding phase from, it just needs to learn to pay its taxes.

Italy:

Problem:  Should never have joined the Euro in the first place. Italy was/is  a drastically uncompetitive economy that was controlled by unions and corrupt politicians. Conversely it had a great design and manufacturing industry coupled with decent tourist industry. They were always able to balance their un-competitiveness with devaluing the Lira (ever heard the saying “you look like a million Lira” …it’s not a compliment!!). When it joined the Euro it gave up its powers over monetary policy and couldn’t devalue the currency so it had to borrow to prop up its un-competitive economy hence they have a sovereign debt crisis not a property bubble leading to a banking crisis.

Solution: Go Maggie Thatcher on its ass and break the unions. A technocrat Mario Monti is in charge and I think he is good but he has his work cut out for him trying to re-educate a population brought up on protectionism. Very difficult thing to do as it requires a paradigm shift from individuals which could take years, decades, lifetimes??. While I wish him the best of luck and think it’s the only solution I just can’t see him achieving  it and not waking up with a horse’s head on his pillow.

Germany:

Problem: Germany is like a junkie it has a love/ hate relationship with Europe. It needs the Euro as it gives it the basis to be one of the most competitive economies in the world but it has a great distaste for the mentality of most of its neighbouring citizens. Germany is built on strict discipline and hard work, most of the rest of Europe not so much. The Euro currency aids the German economy by making its export driven economy cheaper than it would be in Deutchmarks. Money is power and in Europe Germany is pretty much the only ones with money therefore they are making all the decisions. No-one farts in Europe now without Merkel’s say so. The problem for Germany is this insistence on austerity and the German way of doing things is starting to backfire on them. The tough austerity measures coupled with uncompetitive economies is spiralling towards one giant big fail in which if Germany really wants the Euro to succeed will end up having to bail out.  Also they have so much power now they are trying to apply a one size fits all solution to very diverse and independent economies. This will all end in tears and cost Germany. Merkel who I think is a very strong leader is unlikely to win the next election as by that time (next year) Europe will have been bailed out by Germany and Merkel will be the fall girl for it all.

Solution: Recognise that there is not a one size fits all solution to the problems of the Eurozone and instead of concentrating on trying to centralise decision making power spend the time on tailoring individual solutions for individual countries.

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