Hi Karen, Many thanks for posting Richard Medley's Newsweek article, "The Next to Fall? Europe". I don't often read Newsweek except when I'm at the dentist and I must say it was interesting to read this article about Europe from the American point of view.
There's not a lot I can say, really. I think Medley is spot-on. If America goes into a major double-dip (and, as you know, I think this is likely), then Europe will be in far deeper trouble. Quite beside the opacity and indigestible structure of so many large European companies -- without the wider share ownership of America and England (and the ability -- and increasing propensity of shareholders to raise matters at Annual General Meetings) -- and also the off-balance sheet debts of several countries (Italy and Germany in particular) the European Union (EU) itself is in not too sound a condition. For example, the FT front page headlines today tell the story of the European Commission's chief accountant, Marta Andreasen, being sacked within four months of taking the job, when she reported that the US$100 billion budget was full of holes and that she was unable to sign the accounts. The EU is due to enlarge from the present 15 to 26 nations this coming autumn (having been postponed every year since about 1998). Negotiations are far from complete and enlargement will probably be postponed again. The former countries of central Europe, such as Poland are desperate to get hold of the sort of agricultural subsidies that European farmers have been having for the last 20 years, but European countries (France, Spain, Portugal and Ireland particularly) are fiercely resisting any reduction in their subsidies -- while the rest of the EU want to get rid of them altogether. Then again, the enlargement will mean that a new constitution will be needed in order to take decisions. The Germans want a federal-type structure and the French want a highly centralised one (both similar to their existing types of government) and they are going at it hammer-and-tongs. I don't know what Tony Blair wants because he's careful not to commit himself (though he desperately wants to adopt the euro currency) but most of our population (that is, the 25% who think about these things) want to go no further than the present situation -- separate nation-states. I must stop because I could mention several other matters of the great importance (e.g. lack of common immigration policy, lack of equivalence of professional qualifications [thus the "right" of most professionals to work anywhere in the EU is denied in practice -- if you're a bricklayer, that's fine], etc, etc). In short, the EU is a real mess. The senior civil services in the various diplomatic departments of member states, and also the senior politicians, love the idea of the EU because it gives them more possibilities of promotion, perks and power. But no-one else is really bothered about it at all. If Medley is right (and I'm sure he's going to be), then the worsening economic situation will mean that the EU will become even more fractious in a year or two than now. It might even start seriously breaking-up. Keith <<<< The Next to Fall? Europe. European companies face a massive credit crunch and banking crisis, bringing with it the prospect of a Japanese-style deflation By Richard Medley Aug. 5 issue - In the late 1990s, no European moneyman could meet with U.S. Treasury Secretary Larry Summers, among others, without enduring a lecture on the virtues of American capitalism as compared with their own pathetic markets. And their only defense, in the face of Nasdaq, was to mutter darkly, "Wait till the bubble bursts, then we'll see..." FAST FORWARD TO 2002. Europe's dream of revenge has become its nightmare. The U.S. bubble has indeed burst. Stock markets are down half or more. CEOs are led away in handcuffs. Voters doubt the virtues of unbridled capitalism Everything a schadenfreude-loving European could want has happened. Except, Gott-in-Himmel , that European markets are getting trashed even more soundly than American markets. Worse, it's not just equities. European companies face a massive credit crunch, bringing lending to a screeching halt, throwing banks and insurance companies into crisis and, ultimately, saddling Europe with the prospect of a Japanese-style deflation. What a spectacle! Just weeks ago the European Central Bank was talking about a rate hike. Suddenly, a cut's more likely. The rebounding euro now looks set to reverse. And from big insurance companies, which had been lending like crazy, come weak assurances that, never fear, they'll survive. Probably, anyway. Could it be that after funding the long-running U.S. bubble by sending trillions across the Atlantic, and after patiently waiting for the overly aggressive Americans to run themselves on the rocks, the Europeans will be the ultimate losers in the Meltdown of '02? The answer is yes. And that's because markets are not punishing risk and restructuring and flexibility. They are punishing the sins they punished in the Asian financial crisis of 1997 and in the long-running Japanese economic disaster-too much debt, opacity and crony capitalism. Start with debt. When the bear market started 18 months ago, European smugsters said the United States was in deeper trouble because of the extensive "equity culture" in America compared with the "debt culture" in Europe. And it's true, so far as it goes. Because more Americans own shares than do Europeans, they've been harder hit. But there's an ugly flip side to this euro. Thanks to that same "equity culture," coupled with America's love affair with venture capital during the '90s, U.S. corporations are saddled with a lot less debt than European companies. So while the market's fall has cut their valuations, they're not struggling to repay massive loans in their efforts to stay alive. Unlike Europe. The damage is compounded by the fact that what few equities did get issued in Europe tended to be held not by the public, but by the very banks and insurance companies that also hold the now beleaguered corporate debt. Companies won't borrow more when they can't repay what they owe, and banks won't lend when terrified that what they already lent won't be paid back. The result: a serious credit crunch. For a not-so-pleasant look at what this one-two punch does to economic systems, take a look at Japan. It suffers exactly the same combination, with a banking system and economy so weighed down with corporate debt it cannot get off the mat. The second deadly bear-market sin is opacity. When investors are making money, it doesn't matter what they know about companies. Who cares? They're making money. But when investors start to lose money, what they know (and what they fear they don't know) becomes crucial. As we often said during the Asian crisis in the late 1990s, opaque reporting and accounting standards put the paranoids in charge. If you can't trust the numbers you see, then whatever number the most paranoid analyst comes up with is as good as the most reasonable number a company puts out there to calm investors down. The result is a cascading crisis of lowered expectations that cause markets to seize up and that punish even good companies. The same thing is happening now in Europe. Asked if European assets were starting to look attractive, one Italian fund manager last week replied, "I would love to buy European stocks, but I cannot tell what they are worth. With U.S. stocks, if you read the footnotes, you can get a decent idea of what is going on at a company. But what is Allianz worth? I have no idea." And that brings us to our third sin: crony capitalism. Business leaders work with people they know and trust. They don't look as closely or critically at people's plans when working together has paid off in the past. Trouble is, what look like normal business practices on the way up look like irresponsible and greedy glad-handing on the way down. Japanese and many other Asian corporate cultures strongly reward personal relations, massively entangled corporate supply chains, debt obligations and cross-shareholding stock arrangements. Similarly, European corporate culture, with its heavy dose of very large, privately held companies and tight linkages between banks and borrowers, breeds an atmosphere of trust and informal reliance on personal assurance. Again, all this works fine on the way up. But in hard times? Think Enron. It's coming to Europe, only more so. >>>> ---------------------------------------------------------------------------- -------------- Keith Hudson,6 Upper Camden Place, Bath BA1 5HX, England Tel:01225 312622/444881; Fax:01225 447727; E-mail: [EMAIL PROTECTED] ________________________________________________________________________
