By David Goldman :
As I said on Larry Kudlow's CNBC program Nov. 21 , France and Germany need a new Maginot line somewhere around Nice.
Germany's otherwise sober and intelligent Angela Merkel is in flight forward , as I warned in a Nov. 11 Macrostrategy report (still available to the public, but soon to be restricted to paying customers). Germany is simply not big enough to bail out the backward economies of southern Europe, as yesterday's undersubscribed Bund action should make clear. The right solution is to throw the laggards under the bus, and draw the line at the Alps, ring-fencing France and Belgium.
As I explained in the cited report, you simply can't do very much for a country a third of whose economy is black market. Italy and Greece are comparable to Turkey: the state simply doesn't see one in three transactions. The entire political culture down to the capillary level, down to the smallest Sicilian village, is thoroughly corrupt. And southern Europe is dying a slow demographic death as well. Long term, the budget problems of Spain, Italy, and Greece are insoluble, so you might as well put them through bankruptcy now.
The political culture of those countries is corrupt from top to bottom. To get rid of the fleas, you have to kill the dog, that is, starve the state. The obvious way to do this is to auction off all important state assets as well as the notionally-private banking system to foreigners, so that the politicians will loose access to the fountains of corruption. To make this perfectly clear: what is required is not an austerity program, but a thorough-going revolution in economic and social life, a transformation of the way of doing things. The politicians will never agree to this, because any workable solution begins by destroying their livelihoods. And the population will not agree to it, at least not easily, because it implies a harsher, more uncertain, more Anglo-Saxon mode of living. You take a job where it's offered, not in your home city; you get together for a family dinner once every few months when you can afford to travel, not every Sunday; you take two weeks' vacation, not two months; and so forth.
Germany and France have about one-sixth of their economies underground (due to excessive taxes), and America and Canada, less than a tenth. It is simply a different mode of living. The euro makes sense as a common currency for the highly-integrated economies of France, Germany, the Benelux, Denmark, and…well, the list trails off. It was a dreadful error to believe that the dodgy economies of southern Europe could be integrated, unless, of course, it's possible to break off the former Austrian provinces of northern Italy.
The Germans have an ideological obsession with Europe as a political concept, the result of the terrible history of the past century. They don't like thinking of themselves as Germans. They would rather be Europeans. But political models are like automobile models: you can't have one that you can't afford. And the markets are warning Germany and France that the cost of bailing out the south is simply too high. For the time being I would own zero European exposure.
See also The Markets In 2011: Winners, Losers And Missed Opportunities on seekingalpha.com