As economists grapple with the ongoing global crises, they're asking themselves a pair of important questions. First, why have European policies let problems fester for so long? And second, whatever happened to the notion that trade and budget deficits impact currency values? The answers to these two questions are interrelated, and they will have a huge impact on your portfolio in coming years.
The Greek blueprint
Let's tackle Greece first. Watching all of the parties angle for the best possible deal has been like viewing a slow-motion train wreck. German taxpayers hate the idea of perpetually subsidizing countries like Greece. European banks took a bold yet hated step by writing off the value of many Greek loans, and Greek citizens hate the idea of ever-increasing cuts in their social safety net. Nobody is happy, yet nobody is willing to acknowledge an unspoken reality: Simply put, Greece's economy will never be able to turn around while it is tied to the lofty euro. The banks, agreeing to a 50% haircut on their loans, didn't go far enough, as reflected by the fact that bond prices peg the likelihood of loan payback rates closer to 25%. And German policy makers are unwilling to admit that any benefit of being part of a currency union with weaker member states runs the risk of crippling its own economy. Germany's economy has just slipped into recession, and further crises could really tank its economy.