Takes Two To Tango

US & German Bald Eagles flying high...Thank You, 'Euro crisis'

I think Western political elites; especially the European Union (EU) leaders are taking a lesson or two from there Indian counterparts. Don’t solve the problem, treat them just enough, so to keep the citizenry quite. For, problems are the job security of our leaders. Treat them in such a fashion that they become recurring- Kick the can down the road

This is what European leaders are doing. No strong actions are taken to solve the current Euro crisis which is entering its third year. EU’s leadership is so much focused on the short term solutions that daily FTSE, DAX & CAC indices have become there focal point. Bond yields on Spanish & Greek securities have become the talking point for all and sundry, but after 20 EU leaders meetings there is no resolution in sight. The only policy European Monetary Union (EMU) was able to frame was setting up the 7% benchmark. Any government whose security crossed the 7% yield becomes eligible for the IMF/EMU support (‘Bailout’ has become a ‘Financially Incorrect’ term to use). It happened with Ireland, with Greece and with Spain to some extent. The funny part is it’s not an ‘official’ policy.

In the free capitalist world, someone’s Loss is almost always someone’s Gain. Euro crisis is no different. Two economies are gaining tremendously from the current euro crisis- The United States & the Deutsch Land.

US have its own macroeconomic issues. Unemployment is at almost 9% (shadow unemployment ~15%), GDP is growing at a meagerly rate of 1.5-2%, Housing market is still in shambles, Federal Reserve is almost out of ammo. The current drought is putting a stress on the inflation (CPI) and to add salt to the wound, Debt (& Deficit) is growing each and every passing day. But to everyone’s surprise Treasury yield are at historic low. In fact the yield on 6 month bills went into the ‘Negative’ territory. The only decent reason I have is that US is the Best House in the Worst neighborhood. Where else will the investor go; can’t go to Europe, Japan is forbidden since 90’s, China has not opened up its markets and Australia and Canada are not big enough. So the ‘only’ alternative is the US Treasury market. It’s not the Economic reason but the Political reason that’s attracting investors to the US. As they say sometimes, you have to be worried about the Return OF Principle then the Return ON Principle.

Germany, is gaining tremendously from its neighbors trouble. The current crisis has made Angela Merkel a very shrewd leader. She knows that the depressed Euro is good for Germany’s exports. Germany is the world’s fourth largest economy ($3.5 Trillion) and Export makes up 30% of its GDP. Of course it’s in Germany’s favor to keep her neighbors afloat but in the capitalist society there is no harm when you Gain from someone Pain.