The real problem for the euro is the lack of leadership—in banking and politics—in the region. There is no flexibility in the euro currency to help those countries in need.
The failure of decisive action in the eurozone is pronounced, but it is too difficult. There is no unified political, financial, or regulatory leadership. So how can the euro work?
No situation is the same, but Sweden experienced a real estate crash and credit crunch in the early 1990s—the worst since the 1930s.
According to Bo Lundgren, known as Sweden’s “Mr. Fix-It,” here’s what Sweden did after a period of financial disbelief:
1. Sweden unified politically.
2. The government immediately guaranteed all cash deposits at all banks. Two banks (out of more than 100) were nationalized, and they had to give common stock to the government, which was later sold.
3. There was restructuring, the closure of tax loopholes, spending austerity, and a currency devaluation of 25%.
Currency devaluation is the very thing that struggling eurozone countries cannot do. The “Swedish Solution” was not perfect, but at the very least, it was decisive action. After several tough years, Sweden was back on the growth path.
Getting in front of sovereign debt is now critical.
Every quarter or so, there’s a shock in capital markets regarding the sovereign debt and banking crises in the eurozone. Then there are patchwork remedies and more sovereign debt.
Today, finance ministers from the G8 (Germany, France, Italy, United Kingdom, Russia, Japan, Canada, and the United States) are meeting in London.
In their last gathering (for which I am certain the lunch menu was exquisite), the group agreed not to engage in currency wars and to be cautious on sovereign debt. Shortly thereafter, Japan began a new policy to weaken the yen and, subsequently, a massive amount of new monetary stimulus.
The wealthiest euro countries now have less desire for bailouts and sovereign debt. The latest result of badly managed euro banks and the lack of power for currency devaluation is deposit confiscation.
But the cameras shouldn’t be on the lineups; they should be focused on the bankers and politicians who allowed this to happen in the first place. One euro is no longer worth the same in all member countries now. (See “Currency Wars: Where Investors Are Vulnerable.”)
Sovereign debt and poor fiscal management everywhere are coming to a head. And interest rates are at record lows.
Policymakers are not doing enough to deal with this issue, so you’ll have to take action yourself.
Please, re-evaluate all your holdings and your exposure to risk. Control is disappearing.
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