The Pain in Spain

Last week we talked about Greece. But the problems are more than just Greece. We look at two very different views of the euro, and then opposing thoughts on Spain. Is Spain a problem or not? And how can the US keep on spending? Is there a limit? There is a lot to cover in what has been an interesting, if confusing, week.

Germany, Greece, and Spain

Let's start with a little theater of the absurd. Quoting from a Reuters story (you can't make this up!):
 

Greek opposition lawmakers said on Thursday that Germans should pay reparations for their World War Two occupation of Greece before criticizing the country over its yawning fiscal deficits.

How does Germany have the cheek to denounce us over our finances when it has still not paid compensation for Greece's war victims?” Margaritis Tzimas, of the main opposition New Democracy party, told parliament.

This was during a debate in the Greek parliament on how to handle the Greek debt. And it was echoed by both the left and right political parties. Somehow they forgot about the German government paying 115 million deutschmarks in 1960 -- not a small sum back then. It seems that many Greek politicians are still in the denial stage of dealing with this crisis.

In Germany, it’s becoming increasingly clear that there’s little political will to bail out the Greeks without severe austerity measures that will further increase an already deep recession. But I wrote about that last week. Nothing has really changed, except that it’s become even less clear how all this will unfold. But whatever happens, there’s no positive outcome for the Greeks. Only “less bad” outcomes.

Well, a few things did happen. The rest of the EU took away the vote on some issues from Greece, and there are noises that if the Greeks don’t take severe enough measures, they (the EU) will step in and take over. Now THAT would be an interesting spectacle. Just what the market likes: lots of confusion. Try selling a Greek bond in the midst of a modern Greek tragedy.

There are those who think a default by Greece will mean the end of the euro -- or at least, it will do serious damage to it. Count me among the skeptics on that, as a default by California wouldn’t do much damage to the dollar. Greece is only about 2.5% of the Eurozone GDP. It would be a problem, and maybe even a crisis, as European banks have large Greek debt exposure; but Germany in fact could bail out its banks a lot more cheaply than bailing out Greece. And Portugal is even smaller.

I wrote in 2003 that I thought the euro (then at $.88) would go to $1.50 (it got to $1.60) and all the way back to parity ($1) over the course of many years. I still think so. It has and will be a long and rocky road. It’s still not clear how all of the problems in the eurozone countries will be resolved, and by that I mean the serious entitlement liabilities they’ll face in the middle of the decade.

Oh, and as a reminder, I wrote last year and at the beginning of this year that the dollar was going to get stronger. I got more than a few people telling me I was, well, wrong, with varying degrees of politeness. (You need a thick skin to write this column!)