by Don Alexander, MBA
Associate, RSD Solutions Inc.
What was unthinkable two years ago – the consideration of pan-European bank regulation, cross-border deposit guarantees, joint and several Eurobonds, and the very survival of the common currency – appear to be verging on the inevitable now. The staid European Union we knew for its first two decades is a thing of the past.
Douglas Rediker and David Gordon, look at some of these issues in the Jun. 12th issue of Foreign Policy. The authors offer 12 key trends to watch over the next few weeks for help in projecting what the new Europe will look like if it finally emerges from the mire. There are interesting signposts for risk management and serve as tipping points.
Some of these trends such as, Greek dysfunction and Spanish banks, are already well in process. None of them are very encouraging for a benign solution to the euro zone crisis. Several are scarier than others. Greece and its European partners are in for an almost unimaginable set of politically unpalatable choices, and the likelihood of Greece remaining in the Eurozone is very low.
German domestic politics, with federal elections scheduled for this autumn of next year, may be the single-most crucial factor in shaping the final German response to the crisis, with German politicians gauging every move and its impact on that vote. The United States doesn’t possess the inclination, the ideas, or the financial capacity to materially influence the endgame in Europe.
For the so-called Troika, ECB-EC-IMF, tensions revolve around something quite simple: who pays. Neither of the funding programs the EU governments has set up — the EFSF and the ESM — has any significant capital, relying instead on capital markets, leverage, and to some extent “alchemy” to reach its headline funding capacity.
China is not coming to Europe’s financial rescue, but will instead look for potential European investment bargains once forced sellers of distressed assets find themselves without other options.
The European Union remains one of the great experiments of the 20th century. It was a major effort by countries to give up major elements of their sovereignty, acting collectively through a set of agreed-upon rules and coordinated through supranational agencies. The whole process was organized by great strategists and visionaries, but the next stage could be organized by anonymous and impatient financial markets dominated by responses from unknown bureaucrats and politicians.
The lesson for risk management is to look at potential tipping points before the accident occurs.
For more on this follow the link: http://tinyurl.com/6s6dyv9
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