The Eurozone: A Tale of Strange Bedfellows

by Linda Postorivo

Q1 2012 ended with global equity markets less than 10% below the pre-financial crisis high. The stock market rally, which began in the second half of 2011, was credited in part to the assumption that the Eurozone was in control of its problems. The New Year began with the European Central Bank (ECB) extending over one trillion euros in funding to European banks.

The Long-Term Refinancing Operation (LTRO) offered banks three-year loans at a 1% interest rate. Since 80% of funding for businesses in the Eurozone is provided through banks, the stabilization of the financial sector reduced the risk of contagion to the corporate sector.

Although several steps have been taken to date, such as the Greek bailout and recent liquidity measures that have been implemented, which have reduced investors' fears in the short-term, there are many more long-term issues that are not easily resolved.

The first and most obvious is the "Tale of Two Europes." When you talk about Europe, do you mean northern Europe, which is quite industrious and productive, where citizens work hard and pay their taxes or...southern Europe, which is where everyone wants to go on vacation?

Northern Europeans can no longer afford to support their beautiful, fun-loving southern cousins who all live to be 95 because of their stress free lifestyles. This is a cultural attitude that has existed for hundreds of years and cannot easily be changed.

Secondly, creating the euro as a common currency seemed like a wonderful idea on so many levels. After all, isn't that what we did in the United States with the U.S. dollar?

I'm surprised, however, that someone didn't stop to think that not having a centralized government among countries, might just cause problems somewhere along the way.

As we see it, many issues remain with a financial system under pressure. Politics (and economics) make strange bedfellows.