Why Europe needs America!

Being in a country like Canada, and being in the investment management business a very long time helps one have a broader perspective. In my experience (thirty years) global economic cycles tend to follow a pattern out of slumps: US recovers 1st, Europe recovers 2nd and rest-of-world (emerging markets) economies gather momentum towards the end of a long boom. Now that China is a world economic powerhouse – it has to be factored into things but it’s still to early to put a pin in it.

I’ve argued that this current global cycle began in 2010 when U.S. corporate profitability was on the rise and their housing market pretty much bottomed out. Japan’s earthquake put a dent into the recovery’s progress, followed by Europe’s financial woes. The cycle will continue – but like all historical comebacks from cycle lows (the Long Depression of 1873, the Great Depression, post WWI Recession etc.) the timing and magnitude of global growth depends on an array of unknown hurdles and zig-zags.

Despite raging pessimism about the U.S. economy until just this past month, virtually all of the evidence confirms America is yet again the front-runner. The following recent news item reinforces several I’ve listed in previous postings:

NEW YORK, Nov 29 (Reuters) – U.S. consumer confidence bounced back from a 2-1/2 year low in November as apprehension about job and income prospects eased, according to a private sector report released on Tuesday.

The world wants to believe:

NEW YORK, Nov 29 (Reuters) – Global stocks rose slightly and the euro gained on Tuesday even as Italy sold debt at record high rates and as pressure mounted on euro zone finance ministers to resolve the regions debt crisis.

But there has to be a fix of some sort for Europe. The rest of the world, primarily the United States and China, can accelerate matters by taking an active role in European reconstruction sooner rather than later.

We are all trying to preserve and rebuild a global banking infrastructure destabilized by monetary warfare as devastating financially as a 3rd World War.

Looking back at WWI, the Treaty of Versailles (1919) stripped Germany of much of its territory, all of her colonies, most of its iron ore deposits and much of her coal and potash. Reparations of £6,000 million were demanded by the Allies.

Europe’s economy didn’t begin to improve until England and France awoke to the realization that reparations couldn’t hope to be repaid by a debtor that had nothing. Only by opening up their own economies to trade with a Germany allowed to thrive, and one another could matters improve. Unfortunately for all, the so-called “peace” terms gave rise to Hitler.

Following WWII, circumstances weren’t much different, but the Marshall plan adopted in 1947 (originally called the “European Recovery Program”) provided some $13 billion of economic and technical assistance to Western Europe – equivalent to ten times that number in more current dollars.

This effort by the stronger economies to help fix the struggling economies of Europe resulted in a prolonged period of exceptional prosperity, lasting until the 1970’s.

The sooner America and Asia realize that without material financial aid, Europe’s finances will look as ugly as the city of Berlin did after the war, the better. It may be true that there is no apparent mechanism to facilitate European “financial” reconstruction – clearly any steps toward creating a true Euro-bond to replace individual sovereigns’ debt would help. Efforts to move in the right direction are doomed to remain haphazard unless the United States, China and other countries step up and indicate a willingness to participate in a meaningful way.

Modern Berlin looks nothing like it did following the war. The onus is on North America, Asia, South America and even Russia to make sure Europe’s monetary and banking system in the near future looks nothing like it does today.

The only hope for a quick global recovery is for those countries with stronger finances to:

Outline ‘fair’ and practical modifications to the European monetary system that would enable the rest of the world to offer material financial aid to definitively stabilize it.

There was plenty of resistance to the Marshall plan, and there’ll be no shortage of disgruntled finance ministers who’ll resent meddling by outsiders (even those with the funds necessary to restore stability) in European affairs. I expect though that the willingness of Italy, Spain, Greece, France, Germany and others to play nice with one another will increase in direct proportion to the amount of money that could be made available from governments, pension plans and insurance companies worldwide – provided the ECB were to become a functioning central bank. Imagine how quickly the recovery in America would spread – fueling growth in Europe, Asia & emerging countries which would provide a multiplier effect to the United States economy in return. All that’s necessary is to set the cycle loose is for leading global economies to …”Show Europe the money!”

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