Maybe it’s because I have been in Europe this past week (Munich at Octoberfest actually – Men in way-too-short leather shorts, dirndls, beer steins the size of a politician’s ego, the most astonishing amount of drinking, etc. Good heavens.) I have been wondering: Has anyone been paying attention to what’s happening in Europe lately? You’ve read about Europe periodically in this commentary because we think that the financial success of the European Experiment continues to matter a lot for financial markets in the US and for the US economy more broadly. Here’s a flash, it is still broke. We’ve often noticed over the past few years that the European Experiment never gets particularly better, it’s just that we stop thinking about it for long periods of time, and then someone like the delightful Alexis Tsipras, Prime Minister of Greece rips off the gauzy camouflage of normalcy, gives a fiery speech telling the folks that he will give them back all their goodies and they no longer have to worry about those nasty Germans and the like. This reminds us that Greece has done almost none of the things it promised to do for its last bail out and may not get its next bail out. Won’t, if Herr Schäuble gets his way. So we are thrust back into the question of whether Greece is the next country to crash out of the European Community. The foreign minister of Luxembourg last week, speaking with the gravitas of mighty Luxembourg, thundered that the European Community should throw Hungary out because of its human rights record. Now admittedly Hungary is starting to look like an aspirational Turkey, and I’m not at all sure what Turkey is aspiring to, but this is just more evidence of fracture lines. North, south, east, west, the European Community have not really even begun to engage with the consequences of Brexit. As we’ve said in this commentary before, it seems to us that Brexit might be way worse to the experiment that is the European Community than it is for Perfidious Albion itself. France has an election, much like our own, which might be all about who loathes who least. Germany has been kicking the can down the road until its 2017 election, which is looking increasing fraught with nationalistic, and populist left and right making inroads on the conventional and uninspiring middle and Spain has to yet again try to form a government pretty darn soon. Austria, if it can figure out how to lick envelopes properly, is going to elect what appears to be its first radically right-of-center president since World War II and Belgium, Catalonia and the UK, and God knows who else, might try to rip themselves apart over the next few years. Italy, well it’s still Italy. The current government may fall over its big reform referendum and, my God, its banking system! Monte dei Paschi is teetering and if it fails and is bailed in, the Italian political scene will be chaos and the knock-on effect will be felt far beyond the peninsula. Mr. Draghi, while he claims he still owns the big bazooka, is beginning to look like Maxwell Smart…Would you believe…. And all in all, whether our 27 friends in the European Community have a left-of-center or right-of-center government, no one appears ready to pull the cookie jar away from a populace that has gotten really comfortable living beyond its means and spending other people’s money. As Margaret Thatcher said so many years ago, “The problem with socialism is you eventually run out of other people’s money.”
And yet, there is still a little bit of growth at least across northern Europe and the major stock markets across Europe have rebounded wonderfully from Brexit and are showing a certain amount of animal spirits.
What’s it all mean is anybody’s guess, but it seems to us that we are continuing to bear witness to the slow motion train wreck of the European Community Experiment falling apart. Does that mean anything awful is likely to happen any time soon? Not really, but it means that Europe will not be a robust driver of growth, will be increasingly self-absorbed with its internal politics and economics and it’s certainly not going to help us here in the States keep our slowing grinding expansion growing.
I’m not sure what to do with the assessment that Europe’s not thriving. I’m not sure what it means in everyday, workaday transactions activity in the States. But let’s agree, it’s not good, is worth watching, and watching closely. We shouldn’t just notice when some fiery politician makes a speech. We need to keep thinking about what it means and keep recalibrating our business planning for more disruption. A European Community-wide recession could be the reagent that causes a follow-on contraction here and to the extent that its troubles continue to serve as a cause belli for zero bound interest rates in the US, it matters.