Writing From Athens, Epicenter of the Euro's Existential Crisis
Leaders of the European Union failed to reach a unanimous agreement last Friday on a new seven-year, $1.3 trillion budget for their collective government. Adoption of a new budget faces uncompromising hurdles. It must have unanimous support, rendering adoption impossible in the US context. Even across the pond, arriving at consensus is no easy task. The budget debate has reopened deep divisions within the EU, including skepticism about the European experiment from the highest levels of the UK government.
I am just returned from Greece, the center of gravity for efforts to secure Europe’s future. The protests in the streets outside the Grand Bretagne hotel, which sits just a few hundred feet from the Greek parliament, underscore a popular readiness to walk away from the economic and political coalition. That is adding to Greece’s pain. As in Spain and Portugal, a brain drain of the most mobile and productive market participants is an emerging risk.
Euro leaders announced a new deal yesterday that may avert Greece’s moment of truth, or at least delay it. The adjusted bailout terms include several major concessions by their sovereign counterparties, such as a ten-year deferral in interest payments. The German government is right to be concerned about moral hazard. Developments in Greece have implications for how programs may be structured in Cyprus, where crisis is brewing, and in Spain, the fourth-largest economy in the Zone.
New Sources of Instability
Pushing the EU's budget debate off for another year does not carry the same implications as in the United States. If no agreement is reached, the European budget increases at the rate of inflation. The government does not shut down, nor do temporary spending authorizations replace the need for compromise. In comparison with the more immediate problems, the budget discussion is hardly more than symbolic.
Apart from the fiscal cliff in the United States (we are essentially working to delay our own austerity measures), geopolitical developments in Europe remain the primary threats to the economic outlook. To the dismay of its leadership, the crisis is now flaming Europe’s emboldened sovereignty movements, as well.
A referendum on Scottish independence from the United Kingdom, expected in 2014, is coming into political focus. Given the framework laid out in October’s Edinburgh Agreement, the British process will be relatively orderly. The same cannot be said for Catalonia, where the results of Sunday’s election set the stage for a referendum that the Spanish government views as unconstitutional.
Developments in Spain, Greece, and the rest of Europe are influencing real estate debt markets in the United States. Understanding that there are real economic drags from threats to the Eurozone, flows of capital into the relative safe haven of Treasuries are keeping rates near their all-time lows. Plan for the future; that won’t always be the case.