If there were any Nobel Prize-winning economists still trying to claim the share market is efficient, yesterday’s Wall Street and European bounce should put to bed such notions once and for all. After the European Union and IMF agreed to a cobbled together, poorly explained €750 billion bailout of struggling PIIGS, the Dow Jones Index rocketed by 440 points (3.94%) and the broader S&P500 index leapt 4.4%. European stocks rose even more, with the Spanish bourse up almost 15% and London’s FTSE closing 5% higher.
What is more remarkable is the sheer gullibility of speculators (those buying stocks amid such volatility cannot be dubbed “investors”) that some vague plan by the EU and IMF to spend money that it will most likely need to print is considered a good thing.
The bail-out plan appears to involve the 27 Eurozone members chipping in €440 billion in government-backed loan guarantees to any Euro member in trouble — which appears to be most of them. The terms of the guarantees, the cost and the source of funding have not been explained.
Exactly how these nations will be able to afford such largesse was not spoken of. Nor was it explained the source of the IMF’s magical €250 billion. Given the United States is struggling to sell bonds and debt spreads are rocketing across the struggling PIIGS, this absurd band-aid solution seems, being generous — fanciful. The other option is the monetisation of government debt, also known as “printing money”. This wondrous economic activity generally doesn’t yield especially good results — as German and Zimbabwean citizens will no doubt attest.
What’s more — such morally hazardous activities will have no structural effect on the likes of Greece, Spain, Italy, Portugal and Ireland, nations that for more than a decade have lived well beyond their means, and whose populations show little inclination to face reality. Nor will the bail-out cure the implicit problems of a continental currency attempting to govern more than a dozen disparate sovereign states.
The most likely reason for the rapid global bounce on markets yesterday was not necessarily confidence in the latest quick-fix scheme proposed by the EU, but rather, desperate “short-covering” by traders and hedge funds. This causes the market to rise quickly as “short” positions (i.e. when someone has sold a stock they do not own) need to be closed. This is achieved by the speculator “buying” the stock, causing share prices to rise very rapidly. When that happens, algorithmic-trading software also chimes in to grease the upwards movement in markets.
Will the latest proposed bail out solve Euro debt worries? Maybe if you believe in fairy tales, like the one about the country that thought it could solve a debt problem by borrowing (or heaven forbid, printing) more money. As The Independent noted, “the latest rescue package is certainly the most convincing effort yet from European leaders to take control. But until policy makers start tackling the causes of Europe’s twin crises, rather than merely the symptoms, this is likely to prove nothing more than a disaster postponed.”
Or as one commentator put it, “the last thing you give a drunk is another drink”.
When I’m drunk, I usually appreciate another drink. Generally doesn’t help me feel better later though. Unless I enjoy a massive ralph before going to sleep. Either way, Greece looks like it’s in for a very tough time.
The United States of Europe was a bold experiment with a pretty certain outcome.
Most likely a number of EU nations will be ejected from the monetry union to allow them to fix their own problems through currency devaluation, rather than destroying the Euro.
The German taxpayers are likley to refuse to bail out the Spanish or Italians or Portugese, Greece seems to have been the proverbial straw that broke the Camel’s back.
@MichaelJ: Yes, but what’s the point in an EU that dumps members from the union? Isn’t it supposed to be there for the benefit of the members? A fair weather friend like that is unlikely to get dumped members back when they do recover. Socratease has it right, trying to combine wildly different economies under one currency was doomed. If you want it to work, then you need to enforce a certain level of federalism.
Commentator who worry about the source of funding for the Euro rescue should go back to school and enroll in Macroeconomics 101. ‘Printing money’ is exactly what central bank is suppose to do during periods of uncertainty. Currently it is framed as the rich, responsible European states paying for the sin of their poor cousins. In reality, the rich EU countries are simply protecting their own banks who made the loans. It’s just another bank bailout.
Spain and Portugal have a government debt of 55% and 77% of GDP respectively, compared to 110% of Greece. The real issue is NOT the level of debt, but unemployment. Portugal is at 9.2%, while Spain is at 20%!! Without the option of devaluation or inflation, Labour cost in Spain and Portugal is stuck with nowhere to go. (and people in Greece don’t work anyway :-P) . ‘Debt blowout’ is the symptom, not the cause of the underlying economic problem with a common currency.