I was on the ground in Spain a few weeks back, and then I ran into this piece in Spiegel Online about a small, struggling town on the Spanish border with (British) Gibraltar. This essay resonates in some of the same ways as the Michael Lewis piece on Greece. This is just one town, and Spain has many regions, some more prosperous than others; but in a country where there is 23% unemployment and 50% among youth, there is plenty of suffering everywhere. The general story is one of deep problems, especially with regard to inefficient labor laws.
The author asks a big question: "Can the demise of a single city serve as an example that reflects the crisis in the entire country, isolated like a bacterium under the microscope? A crisis that is so severe that it threatens the continued existence of the euro, if not the European Union as a whole?" The answer: probably not, but the plight of La Línea illustrates the problems and the difficult choices faced by the periphery.
Meanwhile, at the other end of the European economic teeter-totter (but just as peripheral, in its own way), we find the City, London's version of Wall St.; and while the residents of La Línea seem to be rather adept at smuggling, they can't hold a candle to the traders of Barclays (and, it would appear, other eminent financial institutions) when it comes to criminality. (There is never just one cockroach.) We have seen some egregious antics by the too-big-to-fail boys the past several years, but Liborgate really takes the cake and eats it too.
It will be hard to contain the outrage when hundreds of trillions of dollars of financial instruments are priced on this figure. A few basis points means tens of millions to the average guys. Heads should roll. And don't think for a minute that the damage – and the blame – are going to be confined to that side of the pond, either. In a deeply probing commentary yesterday on the Libor fiasco, David Kotok takes the Federal Reserve to task over the abandonment of its formal surveillance and oversight role with respect to its primary dealers (which include Barclays Capital, Inc.).
And so the global economic teeter-tottering grows more extreme and destabilizing. What will it take to restore the dynamic balance we need for continued growth? It's a big old system we're all part of, and it's not going to fly right as long as we're more interested in gaming it than growing it.
It was interesting to be at the table tonight with David Zervos of Jefferies, who invited a few local fund managers and your humble analyst to meet with a former voting member of the ECB and Greek citizen (a US-trained economist, too). I want to think more about what I learned, but I imagine my thinking will spill over into future letters. Dear God, we have dug a deep hole for ourselves. I hope at some point we can stop digging.
And finally, as an antidote to the rather somber take on Spain in today's OTB, take a few minutes and watch and listen to this flash mob in Barcelona. How can you be pessimistic for very long about a country that can do this?
Your wanting to stand on solid ground again analyst,
John Mauldin, Editor
Outside the Box
The Tragic Decline of Gibraltar's Spanish Neighbor
Between a Rock and a Hard Place
Many places in Spain are suffering as a result of the euro crisis, but few have been hit as hard as La Línea, a Spanish town which neighbors the prosperous British overseas territory of Gibraltar. With the city on the verge of bankruptcy, many residents have turned to smuggling…