Archive for June 16, 2012

EYE-BALL’s Herman on: 2012 Overture – The Greek Elections

June 16, 2012 Comments off
Herman O'Hermitage
2012 Overture – The Greek Elections
| By: Herman O’Hermitage | 16th June 2012 |
Herman O'HermitageA

s the world waits with nervousness to hear the outcome of tomorrow’s elections, there is further uncertainty ensuing. All that can be possibly determined is whether Greece wants to stay within the Euro. I feel that in these elections there will be a slender margin committing Greece to staying in Euro but the anger at previous administrations, hardship, austerity, wickedly high unemployment, instability of the Greek banks (and Spain and Italy…other ramifications) remain. Mostly my thoughts do not change much and moreover do not affect decisions on the world stage.

If Greece were to stay within Euro there needs to be answers and right now there are none. Angela Merkel continues to deny the concept of a Euro-Borrowing backed by Euro Countries at large. This week she is saying it would constitute a moral hazard. Merkel refers to how each of those countries in threat of default ran fiscal deficits contrary to the accord known as Maastricht Treaty in the earlier times of the European Currency and with access to new money what will change? That pig headedness is much more than a game of high stakes bluff, it is bordering on Russian roulette.

Recently I heard that if Germany were to exit Euro it would make more sense than Greece exiting. Greece and Portugal and Spain all need the mechanism of currency devaluation to re ignite their economy, and Germany needs currency appreciation to counter their over inflated economy and housing bubble amongst other issues. Australia has been dealing with this. Our inflated currency has made several industries uneconomic, Bluescope Steel, domestic manufactures, tourism, higher education and so on. Germany will not destabilise their manufacturing core with currency volatility.

In Europe those countries suffering most (20% unemployment) face 5 years of fiscal drag to half their wage structures, balance their budgets and so on.

About 3 months ago, I predicted Euro will fracture into 2, The Southern Euro and the Northern Euro. I did not offer the likely outcome on the Eastern European states (former communist bloc) but did state their ties to Vienna for capital, would most likely see them align to Berlin. Moscow is always a real alternative, but it has it’s own instability, which is unlikely to fix fast.

The fracture into 2 Euro’s had it’s genesis when Francois Hollande became president of France. France shares borders with Spain and Italy and it’s banking system has not managed well under Greece’s managed government debt default. Hollande has advocated pursuing growth rather than sheer austerity. Very easily conceptualised, but will it happen?

Germany has been locating downstream manufacturing for it’s major brands in first East Germany then other former communist states for the past 3 decades, however why would it be interested in doing so in Greece when Turkey or Slavic states are simply more economic.

In August and September these mini financial markets shocks will still amongst us. After this American presidential election in November we will still be muddling through these depressing economic issues. Early this coming week Wall Street will probably show a relief rally at the Greek elections merely because uncertainty is expected to be addressed. But the Greek election will not prove to be the catharitic solution that most hope for. There will not be any absolute commitment either way. Sadly most Greeks want some sort of miracle. Only those who are on the breadline, and maybe a few academics and social workers truly feel the immensity of the task at hand. Most of the election debate is simply not real.

Andreas Papandreou will even support a Euro government with wide reaching powers to unify fiscal policies, social welfare programs and so on. Such issues were meant to be addressed at these Greek elections. Are the Greeks ready to give up their cultural heritage and identity for a greater Euro zone good? All electioneering appears to be based on hip pocket issues. Who will guarantee jobs and existing income structures?

This all flows through to all of us. The greatest threat to Australia’s banking system comes from a Euro contagion. Of course there are other issues.

In the USA President Obama is now campaigning on his failure to implement his policies (structural reform and expansionary budgets) on the recalcitrance of the rich, those most able to avoid their tax liability. Opinion polls suggest that strategy is working. That is to say, middle America continue to support the incumbent president believing most issues are a carry over from the previous administration and therefore unlikely to trust the conservative nominee, whoever he or she might be.

The only other update that really needs to be mentioned is Beijing. We have now come to fully appreciate how Australia’s economic well-being is tightly correlated with Chinese industrial production and their purchasing manager’s index. China will start to divert excess supply to other sectors of their economy. That was always a given. The Chinese GDP will be another nonsense this year. Well over 6% and below 8%. China’s GDP should not be compared to other western nation’s GDP, more than half of their population are still peasant subsistence farmers. For each farmer who leaves the land to work in heavy industry there is a 4 fold increase in his productivity. In China’s crazy mix of communism (planned economy) and laisse faire for every large failure in the private sector there are many ready willing and able to take over. The advanced education of their youth is truly inspiring. China will increase their military capacity. Turning consumerism inwards is a nonsense concept. Their investment abroad in Africa and South America is much more real. In those countries they are developing ports and road infrastructure. They will become major suppliers to China of valuable raw materials. The big difference regarding domestic consumption I want to stress is;

It is your exports that pay for your imports and determines trade surplus, domestic production and consumption is a zero sum game. When you consume more than you produce, trade deficit it has consequence. Simply look at Greece, USA, Spain and others.

The notion that Beijing would want to intentionally increase domestic consumption, proliferate consumption is just spin. It might be the wish of Chinese individuals to dress in YSL or Gucci or Ferrari, but their consumption is limited by income.

Just try being unemployed in Greece or Portugal or many other European cities right now.


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