I am of the opinion that the world has changed.
Many of us are looking for some sort of mean reversion, but it’s not going to happen.
European Union, for one, is a wild thing.
It was originally a French project, which is what people tend to forget.
After World War II, the French looked around and said – hey, where did everybody go?
The Brits had gone home, the Spanish were languishing under their own dictatorship, Germany and Italy were divided and occupied, and the Soviets were considerate enough to drop an iron curtain, which basically blocked half of Europe from interaction, so the French realized – hey, this is a competition we can win!
So they created the Union as a platform to project political power over Europe (the initiative had a different name back then).
Well, they didn’t like 1989, when Germany reunited and quickly took control of the business.
For starters, they moved their parts suppliers to Eastern Europe, where the wages are three times lower, but competencies are not.
It’s kind of globalization, but only within the area. An excellent 8-speed automatic transmission is built in Romania and shipped to South Carolina to be bolted to a BMW assembled there, sold to American clients and still considered a German car.
If you’re in Eastern Europe or you are Germany, you’re selling to the Chinese and the Americans, and you make off like a bandit.
But when you look at France, Spain or Italy – they can’t play that game.
They’re not big export countries, they are consumption economies.
If somebody is running a surplus, then logically somebody else has to run a deficit.
Now, if you don’t allow them to run deficits, as the austerity policy requires, then the only way to react to it is to permanently constraint their economies, meaning shrinking them.
So basically the French, the Italians and the Spaniards are forced into austerity policy, so the German, the Poles or the Romanians can make money selling to the rest of the world.
Do you think that may push the National Front over the edge one day?
The big problem with Euro is that there is no unified European debt that should be a basis for the currency (the money now is debt based, not gold based, but the mechanism is the same). Each of the member countries prints their own Euros, and their national debt (bonds of each country) guarantees the currency.
Or, as they say elegantly in textbooks – the currency is guaranteed by the ability of the government to tax its citizens. And if you need a moment to regain your composure after that sentence, take your time.
Problem is, the national bonds have widely different interest, or rather they would if it wasn’t for constant interventions by the European Central Bank in the bond market. Their balance sheet now equals to 40% of GDP of the Euro zone. And there is no plan how to exit these positions without triggering a mother of a crash. This is the proof, if you still need one, how bad of a design the Euro is.
So here is a suggestion for the brave boys and girls at the ECB in Frankfurt– buy a big paper-shredding machine, put it in the basement and start trashing the bonds you sitting on.
In my view, there never will be a unified European debt - the Euro will fall first. There is a simple reason for it – unified debt will sell at interest that is some amalgamation of rates that member states get in the market.
For countries like Germany, this would mean that the cost of capital would go up, perhaps way up.
Try to sell this to the German industrial elites – good luck with that Frau Merkel.
I will slow down now.
You don’t get to replicate the past. The very thing that you lived the past means simply that the past can’t come up again. The world is always a world of becoming and you live it forward into the unknown. As humans we like to see patterns where there are none, because the world is actually much more random. And it can be brutal, I know.
Welcome to the Masterpiece, but remember - you shape it too, it will never be the same without you.
I was sitting in a fish restaurant called Iaccato, deep inside the Brindisi harbour, right where the Italian military zone starts and where a large destroyer was parked dominating the view.
To the right of me, as the harbor opened to the sea, was a number of private yachts, not quite Monaco crowd, but interesting still. I was marveling at the name of the closest one – Marietta Barreta, and you got to love Italian, it just rolls down your tongue.
“Welcome to paradise!” said the waiter.
“That’s a bit of a stretch, but I like it here.”
Brindisi is a city in southern Italy, strategically located on the coast of the Adriatic Sea. It is a major port for trade with Greece and the Middle East.
The port was inhabited since prehistoric era – archeological findings date back to at least 12’000 years ago, at least this is what the locals say. Very early on it became a major center of Roman naval power and maritime trade.
Later, with the opening of the Suez channel it became the main port of shipment and communication route between Western Europe and the East.
In 1960 a USAF base was activated in San Vito dei Normanni, just outside of Brindisi.
It’s main purpose was COMINT (communication intelligence) and it was staffed with up to 10’000 support personnel. In 1994 the base’s mission was withdrawn, but it re-opened later to support air strikes during the Bosnia and Kosovo wars. In 2000 it was officially closed, however many soldiers decided to stay in the area. I saw a couple of them riding heavy Harleys on Via Appia, the ancient Roman road – they’re easy to spot: once a soldier, always a soldier.
There is also a large British presence here – many settlers are pensioners, buying villas in the Brindisi countryside.
As I sipped red wine after the dinner, the discussion between the Brits at the bar turned into the real possibility of Italy leaving the Eurozone. Obviously, they were fueled by beer from early on, so it was impossible to miss the loud conversation.
“Third largest economy in Europe, it will be a trouble if they leave the EU, it will start a chain reaction.”
“Or even worse,” said the other one, “what if they stay?”
In the real life always the little things make the difference. There is one such problem in Italy that is potentially huge, but totally missed by the press.
The most threatening issue here is likely the attempt to raise inheritance taxes as being forced by EU in Brussels.
Culturally, Italy has the lowest inheritance tax in all of Europe.
The German inheritance tax rates range from 17% to 50%, depending on your relationship to the decedent.
In Italy, the Italian Inheritance Tax is applied to all the assets worldwide belonging to the deceased if the person is a resident of Italy ONLY. If the person lives outside of Italy, then the tax is applied only to assets in Italy. Where everyone else has generally inheritance taxes of 15% or higher for the immediate family, Italy that rate is just 4%.
Rental income in Italy is extremely low. People have plowed their savings into real estate BECAUSE of the inheritance tax.
If the inheritance tax is tripled, as Brussels wants, what you will see in Italy is the biggest crash in real estate in modern history.
Who down here in paradise has the appetite for that?
So, I had a great dish of raw seafood on ice at the Iaccato. Then, as the sunset came, I left the harbour and drove back north.