Hey all! Of all, I’m looking mostly for BChad’s opinion but any viewpoints are highly regarded. Does the further integration of the EU reduce political risk in the PIIGS? The fact that Germany and France can now dictate terms in these countries and orchestrate action in the these countries along with their own, should bring greater stability and integration, right? The way I see it, the EU will basically be one political/monteary unit from this point forward as the bailouts last for decades and the number of bailouts increase over time. Such integration should bring incredible risk reductions when all said countries are combined. Or is the risk of uprising in countries like Greece, a greater boost to risk than the benefit of additional integration? The labour market in Greece was already so messed, I don’t see how it can get much more messed up. Thoughts?
I’ve been trying to wrap my head around this, and it’s definitely difficult to say. I’d say that short term, risk is contained. Long term, I’d say the balance is that risk is reduced, but the tails can still whack you. That suggests having a long bias plus some options to cover the tails. I am not sure what the political details of the bailout are exactly. France and Germany get to call a lot of the shots, and to impose austerity on PIIGS if they want assistance. If there is rioting in the streets, there could be a political call for countries to exit the Euro. This is something that US States can’t do (we settled that in 1865). So for now it seems that european country budgets are a lot like US state budgets, but there still isn’t a europe-wide budget or transfer system, as there is in the US with the Federal budget, and EU countries appear to have the option to leave if they want to (US States never truly had that option, at least not since the Civil War). The real risk seems to be policy uncertainty. No one really knows how a mess like this will work out, in part because there’s no real discussion about how people would try to work it out, so no one has a precedent to go on, or legal legislation to go on. So, just be prepared to change your opinion as the facts change, I guess.
Financial risk is reduced, but I’m not so sure about political risk. Many (especially the working class) all over Europe are very angry that their tax money is being used to bail out a country that some think doesn’t even deserve it to begin with. Also, look at Greece itself lately. I don’t call that increased political stability, despite the bail out.
We are one United states, would you say the political risk for the financial system (or individual company) increased or decreased? I would say increased as a result of the bailout. Now, let’s increase this bailout situation’s complexity by introducing more county and more citizens, they have German’s money bailing out Greek economy. I would say political risk to EU financial system would have to increase.
CC: the instability was there before the bailout. and such reductions in politcal risk would surely be a 10yr+ phenomenon. WS: we were one united states before the bailout and the bailout has not effected the politics in the US, so it not comparable to how over $1 trillion interlinks all participating EU economies politically. i’m going to have to agree with bchad that the tails still exist, and may be even more severe due to the fact that if there were another crisis, there are very few who are able to bailout the whole EU.