The Good News: The euro crisis has failed to explode in the last three years, in spite of repeated predictions that it would. Many commentators now rejoice that the problem is solved.
The Bad News: Don't believe it. While a few of the countries have made steps toward recovery, there are still several that haven't, and, by and large, those that haven't are larger than those that have.
As always with European crises, the summer should be a quiet period as everyone puts aside these dire economic issues and goes on holiday. But there will be more fireworks after September's German election, when tough decisions will be made.
And that's why gold (and select emerging markets) remain strategic holdings in smart investors' portfolios.
Europe's Rogues Gallery
Greece is the worst basket case, and will almost certainly need bailing out again.
In spite of a drop in GDP of a full 25% since the start of the crisis, it is STILL expected to run a balance of payments deficit this year. That's worrying.
If you push an economy into a giant recession, you expect it to have trouble balancing its budget because government revenue declines and welfare spending increases. The Economist magazine's panel of forecasters expects Greece to run a budget deficit of 5.3% of GDP this year.
However, the balance of payments works the opposite way – a giant recession means domestic consumers can no longer afford foreign goods, while exporters can cut wages and the cost of supplies and make themselves more competitive.
In 2008-09, Latvia suffered a brutal recession while its currency was linked to the euro – but its current account swung from a deficit of 15% of GDP to a surplus of 10% of GDP. Latvians, unlike Greeks, are good at austerity, but the recession itself helped them solve their balance of payments problem.
Greece's failure to solve its own problem indicates that the economy is truly a basket case and that new debt is very unlikely to be repaid.
Cyprus, Greece's little brother, is still descending into the maelstrom following its banking crisis. Judging by the Greek example, there will be further crises here also.
On the positive side, Spain and Portugal both have sensible governments, which have done much of what they need to do. They have had bad recessions, and even 2014 is projected to show flat GDP in both cases, but both countries' balance of payments has swung positive, and the 2013 budget deficits are below their peaks in spite of the recessions.
Provided both countries' volatile electorates don't do anything stupid, and state spending cuts are extended into 2014, both countries should be growing again and stable by the second half of next year.
Italy's electorate, on the other hand, already did something stupid by electing the socialists in February, with a strong showing for a comedian who has refused to join any coalition.
The current account is about in balance, but unlike in Spain and Portugal, spending restraint was pretty conclusively defeated. (Mario Monti, the austerity candidate, got 8% of the vote.) What's more, Italy will almost certainly have another election within the next six months – where almost anything could happen.
Finally, France is locked into a government that is bitterly opposed to austerity and wants to tax its most productive citizens at rates which, taking income tax and wealth tax together, exceed 100%.
Already, the state absorbs more than 55% of GDP and that proportion is rising. Naturally, both trade and budget balances are negative and getting worse. Yet the bond market still does not recognize the problem; 10-year French Treasury bonds "OATs" still yield less than British or U.S. Treasuries.
There are two possible routes to the next Euro crisis.
One: An economic crisis in one of the staggering euro members, probably France or Italy after the German election (any crisis before then will have money thrown at it by the European Central Bank).
Two: A general tightening of credit, which appears to be beginning in the United States and could easily spread to the world as a whole, as confidence in central bank bailouts disappears.
In that case, problems in the Eurozone that are now simply chronic will become immediate, as finance for the weak sisters will no longer be available. That route to disaster is unlikely in 2013, more likely in late 2014.
One way or another, the Eurozone has not finished with crisis, and the most likely outcome remains a breakup of the euro.
For us, Asia, the better parts of Latin America and even Africa look better than ever, as does gold.
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