In Between Days: Europe – Enjoy the Silence

by CC December 11, 2011 11:30 pm • Commentary

It looks like we’ll finally get a week where U.S. market watchers can focus more on U.S. economic data and Fed policy than their counterparts in Europe. Dan and I don’t think the news out of Europe is enough to solve the crisis in the long term, or even medium term, but it is probably enough to keep debt markets from going berserk at least through the end of the year. It wouldn’t surprise me if we see the markets take a bit of a breather for the next few weeks as the holiday season starts and people just seem gassed from all this volatility since August. As far as this week, the FOMC meeting on Wednesday shouldn’t have too many fireworks but that won’t stop people from trying to read between the lines. Retail sales on Tuesday, Jobless Claims and Europe PMI, on Thursday and CPI on Friday could move markets. Earnings of note: Best Buy on Tues. and Adobe and Fedex on Friday.

Pragmatic Capitalism

Gauging from the market reaction to the end of the EU summit, you might presume that the European sovereign debt crisis is over.   But this is clearly not the case as the EU summit really didn’t alter anything.

Let’s remember, the cause of the sovereign debt crisis is rather simple.  These countries are all using the same currency so there is no floating exchange rate to help balance trade.   This leads to persistent trade imbalances.  There is also no federal government.  So what happens over time is that trade deficits are built up in certain regions and largely financed trade surplus nations.  There is no currency sovereignty in the region because there is no direct linkage between the ECB and the governments.  In other words, the ECB serves as a sort of foreign central bank making the governments users of foreign denominated debt.  This results in all the countries being currency users which creates a real solvency risk (unlike in the USA).   The situation is precisely the same in the US for the states.  There are trade deficit and surplus states in the USA and there is a very real solvency risk at the state level.  Although all the states use the same currency, the difference is that the states in the USA are part of a union with political and fiscal cohesion.  The US federal government makes large disbursements to the states on an annual basis helping them fill any budget gaps that might appear over time.  Europe does not have this fiscal transfer mechanism.  So, no FX to balance trade.  And no fiscal transfer system to eliminate the solvency crisis as it inevitably appears over time as trade imbalances grow.

So, the real fix to the EMU is rather simple.  You have to create sovereign monetary states.  This means reverting back to the old system or going full bore into a US of Europe.


The new political (the “fiscal compact”) and funding arrangements are what matter, along with the response of the ECB.

The fiscal compact has some worthy long-term goals but won’t in itself be able to solve the eurozone’s balance of payments problems, and it also introduces a new round of political risk into the first half of 2012. It’s also unclear whether the European Commission has the requisite authority to provide institutional support to the compact — though Brussels remains supremely gifted at legal pragmatism, if nothing else.






NFIB Small Business Optimism Index for November

Retail Sales for November

FOMC Decision


Import and Export Prices for November

Atlanta Fed President Dennis Lockhart speaks


December Flash PMI for the Euro Zone, Germany and France

Empire State Manufacturing Survey for December

PPI for November

Weekly Jobless Claims

October TIC data

Industrial Production and Capacity Utilization for November

Philadelphia Fed Business Outlook Survey for December


ECB President Mario Draghi Speaks

CPI for November





Best Buy


Joy Global


Discover Financial

Adobe Systems



Darden Restaurants


A movie quote or a lyric from a song usually pops into my mind when writing these posts, I then go on the YouTubes to find video of that inspiration to embed. The lyric Enjoy the Silence popped into my head thinking about the week ahead. I went on YouTube to find the video for the Depeche Mode song and had no idea they filmed a video for it on the roof of the World Trade Center. I remembered a different one from when I was young, I’d never seen this one before and had no idea it existed. The views in the video are both spectacular and emotional but like the movie Man On Wire remind you of more innocent times. I’d never been on the rooftop viewing area of the WTC but certainly had a few after work drinks up at Windows on the World. I sometimes forget just how spectacular it was up there. So anyway, while I’ll always remember my friends and co-workers who lost their lives there, and that morning,  it’s nice to occasionally remember those larger than life buildings from the good times had there as well.