The Lack of Cultural Agreement Roars, the Eurozone Mews

Economic systems are the result of cultures. Where there is little cultural agreement, the economic system will be unstable, as will be governmental action.

No, this is not another “Rules” post. But this is a post about the Eurozone and Japan today. Japan faces trouble, but there is cultural agreement on what should be done, so there is no great crisis today, though the demographics may force issues eventually.

The Eurozone does not publicly recognize that there are large disagreements over what economic policy should be. In the countries that are in economic trouble, there are many that push their governments to spend more on them, forcing the governments to borrow more. This is particularly true of the unions.

My view of unions is that they slowly kill whomever they serve. Industries with high unionization die eventually. Countries that support unions die slowly as well.

Unions introduce inflexibility into the economic process which has a huge cost, eventually. Greece is controlled by its unions. They are willing to seek their own prosperity even if it leads to the destruction of the nation. They don’t think the nation will be destroyed, but think that there are parties in power that hold back value from them, and they must be opposed, deluded fools that the unions are.

But there is a bigger problem for the Eurozone. What do they do about Portugal, Ireland, Spain, and maybe Italy? Yeah, the Eurozone could rescue Greece, but could it rescue Spain? The answer is simple, NO. But rescuing Greece discourages Spain from taking hard actions.

There is a lot of moral hazard involved in rescuing countries in the Eurozone. Far better for nations to rescue banks that have lent to Greece, Portugal, Ireland, Spain, Italy, etc. From what I have read, Europeans don’t exist. Nations exist around a common culture and language. Nations in Europe exist, and many act against the concept of a Eurozone.

Both positively and negatively, one can say that the Eurozone can’t make everyone into Germans. The Germans exercised discipline that other nations would not. Because of the size of Germany, and those allied with them in the Eurozone, the Euro is a hard currency, harder than many cultures/nations with lower labor productivity would like.

Why is the Euro weak? Because the present crisis has relegated it to the status of an experiment. Wondering over how Eurozone obligations will be repaid is an issue outside the Eurozone. There are solutions, but they are painful — 1) let Greece become a state of Germany. Not happening. 2) Let the Eurozone pour money into Greece; I’m sure they will reward you by adopting austerity measures, not. 3) Let Greece default, and then, let the Eurozone attempt to ameliorate it. It will be difficult, and I doubt that debts to Greece will be settled at over 40% per Euro.

The major trouble is that banks in countries with relatively orthodox finances have lent to countries with liberal finances. Well, who else could have done it, but the banks making the loans are in a fix because their health is subject to the creditworthiness of those that they lent to, which should be no surprise, but we forget.

Thus the big crisis in Europe is really over the soundness of the banking sector. Rather than bailing out nations in trouble, far better to bailout your own banks that made bad loans, and let the profligate nations fail. Remember, the Eurozone was not a promise to support profligate nations, but an effort for responsible nations to share a common currency. If nations are not responsible, it is not the responsibility of the other Eurozone nations to subsidize them.

Do you want to save the Eurozone? Save it by protecting your own banks, and letting profligate nations fail. You will end up with a “hard” Eurozone of nations that are not profligate, and can live up to the demands of a strong currency. The Eurozone exists without the UK. It can exist without Greece, Portugal, Spain, Italy, and Ireland.

Subsidies don’t work, and that is what the loans to Greece are. The Greeks will just suck them in, and continue their unruly fracas over who gets what. Far better to let Greece fail, and scare marginal nations to clean up their acts.


I don’t write this because I want the US Dollar to prosper because of a failure of the Euro. Hey, I want credible alternatives to the Dollar, because it is at best the best of a bunch of sorry currencies, and I am not ready to sign on to the cult of Gold. I like gold as a currency, but am not crazy about it as an investment.

My view is that the Euro can exist even after the failure of nations that leave the Euro, and that Euro obligations could still be enforced on defaulting nations because of the large amount of commerce inside Europe.

My advice to European statesmen, including those that share my surname, is to focus on your national interests. The Eurozone is too vague to matter to those who elect you. Focus on protecting your banks, rather than those the banks have lent to, which would waste money.

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About David Merkel 145 Articles

Affiliation: Finacorp Securities

David J. Merkel, CFA, FSA — From 2003-2007, I was a leading commentator at the excellent investment website ( Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and now I write for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I still contribute to RealMoney, but I have scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After one year of operation, I believe I have achieved that.

In 2008, I became the Chief Economist and Director of Research of Finacorp Securities. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm.

Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life.

I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

Visit: The Aleph Blog

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