Markets Should Beware of Europe This Summer

May 13, 2013

If you blinked, you missed it: the amount of time that the US financial media has spent analyzing the potential fallout from recent events in Europe, not just in Cyprus but in Italy, Spain, Slovenia and elsewhere.

At this writing, US markets are up nearly 12 percent year-to-date, either unconcerned or oblivious to the multiple crises developing in the Mediterranean region on economic, political and military fronts.

In Cyprus, the extortion that the Cypriot government agreed to with the European Union — taxing depositors with more than 100,000 Euros at over 30 percent — must ultimately be a Faustian bargain; they may have satiated their creditors for now, but what will they tax, confiscate or steal to make their next payment?  More importantly, how will Cyprus ever again attract another large depositor to its banking sector, estimated to be responsible for nearly 80 percent of Cypriot GDP?  Throughout the Mediterranean corridor, capital has fled the regional banks of the most indebted nations and new accounts are practically non-existent.  If Cyprus has just sold its economic soul to pay a single installment to its EU masters, surely the country is bordering on financial and social collapse.  Tourism (the other 20 percent of Cyprus’ economy) requires clean streets and beaches, the revenue for which came from banking, so don’t expect the travel plans of foreigners to include stops in Cyprus this summer. Many analysts have questioned whether Cyprus is the teetering “First Domino” in the eventual and inevitable break-up of the 17-nation union sharing that common currency.

Economist send in the clowns cover

In Italy, their many political factions have finally formed a government after February elections left no clear winner, and the cover of The Economist showed a picture of the two front runners with the caption, “Send in the Clowns.”  The new government is hardly stable, not likely to get necessary reforms passed, and the anti-EU Silvio Berlusconi will surely have a saboteur’s card to play this summer.

In Spain and Greece, unemployment has recently crept up to a staggering 27 percent — and youth unemployment is estimated to exceed 50 percent in some provinces.  Just as a point of reference, US unemployment never exceeded 23 percent during the decade of the Great Depression. The new government is hardly stable, not likely to get necessary reforms passed, and the anti-EU Silvio Berlusconi will surely have a saboteur’s card to play this summer.

In Syria, Israeli fighter jets have conducted strikes against suspected WMD sites and groups believed to have them.  Historically, whenever Israeli warplanes violate the sovereign airspace of an Arab state, other Arab nations become incensed and tensions in the region escalate.  Iran is looking on furious, and doubling down on its longstanding threat to destroy Israel — even as they continue to claim their nuclear ambitions are peaceful and purely for public utility.  It was nearly a year ago that Israeli Prime Minister Benjamin Netanyahu said that the window of opportunity for a military deterrent to Iran’s development of a nuclear weapon “can be measured in months, not years,” and many now suspect that Israel will use proof of Iran’s Syrian sponsorship as a pretense for a direct “retaliatory” strike against Iran.  Markets around the world are not likely to celebrate such a development.

By Ricardo Stuckert/PR (Agência Brasil [1]) [CC-BY-3.0-br (], via Wikimedia CommonsIn Germany and Turkey, economic growth has slowed to a barely-perceptible crawl, not a good sign for the rest of Europe, which continues to languish between recession and depression. Germans are going to the polls in September to either give Angela Merkel the boot or more time, neither of which they’re likely to be happy about.  Since the EU crisis unfolded, not a single major Eurozone Prime Minister has been reelected, so her chances are not good.  Germans don’t like the bailouts, and a continued downturn in their own economy won’t make them any happier. If a new anti-euro party peels enough votes from the center-right to deny Merkel an outright victory, expect her loss to fuel widespread uncertainty and even panic in regional and world markets.  If US markets haven’t come to their senses by September, will a Merkel loss finally be the “unthinkable” event that brings them to their senses?

Don’t hold your breath.  As John Maynard Keynes warned, “Markets can remain irrational longer than you can remain solvent.”

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Thomas K. Brueckner

President & Chief Executive Officer

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