As I sit here in my home in Tucson, Arizona, the temperature is nearly 40 degrees. So far this year, and as I write this, we have had 17 days of 38 degrees or higher. We have not had measurable rain in Tucson since March. In the state of New Mexico, to the east of Arizona, the largest forest fire in their history rages on – to date it has consumed 112,000 hectares. We have already had a number of small fires throughout Arizona and will have more – it is what we live with in an area under persistent drought.
But this week’s article is not about the weather or drought conditions in the southwestern United States, however fascinating that might be. Instead, it’s about the hellish financial and political summer the world faces. If you’re looking for an article to read about peace, sweetness and light eternal, I suggest you put down the paper now, or turn the page. If you are reading this electronically, then perhaps you should open up a different page in your web browser.
Last week I wrote about the break-up of the European Union. I noted how a number of influential leaders, from both business and government, are predicting the Euro will collapse in a matter of weeks or months. This week IMF Director Christine Lagarde said that action must be taken in “shortly more than three months,” a fancy way of saying “there isn’t much time.” No matter what the length of time predicted, events are now moving faster than most leaders can imagine. The financial markets operate 24/7 and political leaders (especially those in the EU) need time to make agreements. And when you’re dealing with 27 different governments, trying to reach an agreement on any one thing is not an easy task.
Yet some continue to offer up so-called solutions. The New Yorker magazine writes “A peculiar feature of the euro situation is that the solutions to it are economically obvious. They are to federalize euro debt, and spread it across the euro zone; to introduce new euro-zone-wide institutions and fiscal rules to supervise the currency and the debt; and to adopt a medium-term strategy for growth, which would include structural reforms and increased competition. Unfortunately, the Germans hate the federalized debt, because they will end up paying most of it; the indebted countries hate the new rules, because of the loss of sovereignty that they entail; and the creditor countries in northern Europe hate the idea of a growth plan that will involve more deficit spending of the sort which, in their view, started all the trouble in the first place.”
The question is, who will blink first in this game of chicken? Will Germany cave in and go for Euro-bonds? Will the southern EU countries agree to cede their sovereignty? Will the UK vote to leave the EU? Stay tuned!
Next up on the Financial Disaster World Tour Summer 2012 is the Greek elections this weekend. But frankly, it doesn’t matter who is elected on Sunday in Greece. Even if New Democracy wins and manages to cobble together a government that promises to stick with the EU agreement and austerity measures, the new government will not be able to implement the plan and will, within months, fall. In the meantime, people will continue withdrawing their Euros from banks (Greece will be fortunate if it escapes an all-out bank run), tax evasion will continue, payments will be made late or not at all to public and private sector employees, unemployment will continue to rise and the markets will keep betting that eventually, Greece will go bankrupt and be forced out of the Euro or the EU itself. And over in France there is the second round of parliamentary elections which in all likelihood with give new French President Hollande a majority of socialists in parliament so he can follow Greece: witness his pledge to reduce the retirement age to 60 from 62.
As for the rest of the EU countries in the sick ward – Spain, Ireland, Italy, Portugal and now Cyprus – they will continue to get sicker as well. Spain has been forced to ask for a $125 billion bailout for its banks but that will merely lead to the need for another bailout soon. Italy is probably next after that.
Add to this volatile mix all of the other issues facing the world – a potentially nuclear Iran, the continuing Arab spring, now summer, Afghanistan, Iraq, terrorism in general, economic stagnation in America and a host of other issues – and you have yourself one noxious cocktail that will produce one hellish summer. It won’t be pretty.
My advice? Take a vacation, relax, enjoy yourselves. Spend time with your family and friends. Visit Lake Ohrid (unless you live there of course) more than once and soak it all in. You’ll want to look back and remember this summer saying “I’m glad we enjoyed that summer before it all went to hell.”