May 4, 2012

Germany Key to Europe’s ‘Hangover’ Problem: Strategic Investment Conference

Germany wants a federal union that will lead to cheap currency and lower unemployment. But what will they pay for it?

David McWilliams, one of Ireland’s leading economic commentators, spoke during the lunchtime keynote Thursday at the 2012 Strategic Investment Conference, jointly hosted by the alternative investment firm Altegris and Millennium Wave Investments in Carlsbad, Calif.

The broadcaster and bestselling author began his discussion of what ails Europe by telling the audience, “You know it’s a strange time in Europe when the Pope is German and the head of the ECB is Italian.”

David McWilliamsMcWilliams (left), who says he was the first economist to see that the Irish boom was nothing more than a credit bubble and was one of the very few to accurately predict it would all end in a monumental crash, said his perspective is fueled by having lived through a civil war, four different currencies and two financial meltdowns.

“The key to what’s happening in Europe right now is Germany,” he said. “It reminds me of the four guys in ‘The Hangover.’ Germany wakes up and realizes they’ve been sleeping with the Greeks, and the Italians realize they’ve been drinking with the Irish.”

Ireland and Greece borrowed too much, he added, and were surprised when Germany came knocking and asked for it back.

“Jack Welch once told me that in any crisis, you must first define your reality not as you would like, but as it is. You then do something about it. Once you define the problem and do something about it, you realize it’s not half as difficult or traumatic as you initially thought.”

The question for today, he said, is whether or not Germany has defined its reality.

“Europe as a whole traditionally has not,” McWilliams continued. “In each of the last four or five years their forecast has been revised downward. Each year they say, ‘What do we do about [the crisis].’ The answer always seems to be, ‘the same as we did the year before.’”

The problem with Greece, he explained, is not that the country defaulted, but that it didn’t default enough, meaning it will do so again.

“In Ireland, we spent too much. There’s no money left. We are borrowing from tomorrow not to pay for today, but to pay for yesterday. When this happens economies contract and demand diminishes. Germany builds Mercedes and exports them to Ireland. The problem is that we then must borrow from Germany in order to purchase the cars that they send us.”

Spain is experiencing 25% unemployment and the leaders in Greece and Italy were recently deposed and replaced with unelected technocrats.

“In these countries, there is too much debt, too little growth, not enough leadership and what leadership there is does not have legitimacy. This is a serious, existential problem for Europe that won’t be fixed with fancy-schmancy financial engineering.”

So how will it be solved?

“One thing to remember is that debt is often worse for the lender than the borrower,” McWilliams said. “If you lend me money and I go down the street to a bar and blow it all getting drunk, who really has the problem? Not me.”

The European Union has to go back to Germany and ask, “What do you want?” he said. “Germany wants a federal union that will lead to cheap currency for their industrial base that will in turn lead to lower unemployment. That’s fine, but then the question becomes, ‘What will they pay for it?’”

Germany, McWilliams said, will have to open “a big dumpster and throw all of our bad stuff in; bad mortgages, bad loans, etc. That will be the price they pay.”

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See complete coverage of the 2012 Strategic Investment Conference on AdvisorOne.

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