The expression "sell in May and go away" has been around for a lot longer than the economic crisis in southern Europe, but as the U.S. markets once again had a tough May it looks like the bad penny that is the Greek/Spanish crisis has turned up once again. While this is admittedly a complicated situation, it's entirely fair for investors in North America to ask why we are all still forced to talk about this mess and why it continues to impact our markets and economy.
Simply Put, the Problem Isn't Shrinking
The simplest answer as to why we're still talking about Greece is that Greece is still a problem. Not only is the situation not getting better, it is getting worse in many respects. The austerity measures that Greece had to implement to get bailed out have, not surprisingly, made a bad situation worse. Said differently, bailouts just don't work when a country/economy has deep structural problems.
Austerity measures have forced the Greek government to dramatically cut its spending, which has in turn sapped even more strength from the Greek economy. The Greek private sector simply cannot replace that lost spending, and GDP is falling. At the same time, Greek businesses are finding it harder and harder to get financing (to say nothing of preexisting issues that make it difficult and costly for businesses to hire workers), and so employment and output are declining.
At the risk of oversimplification, the idea behind bailing out Greece was to give it "breathing room" and a chance to balance its income with its expenses. Unfortunately, income (as measured in GDP) continues to decline, which makes prior assumptions and budget deficits, debt repayments and so forth, invalid.
Making a bad situation worse, the Greek public is hardly universally supportive of the idea that they have to take their medicine after years of living off of cheap subsidized debt. Tax evasion is rampant, the shadow economy continues to grow and Greek voters have increasingly turned to politicians and political parties that are long on nationalistic rhetoric, but remarkably short on cogent plans (beyond somehow "sticking it to richer European countries.")
What this all means is that all of the money, time and angst spent on keeping Greece in the eurozone may prove for naught. There are already rumors that the Greek government has contracted with printers to produce new banknotes, and German politicians seem to have had it with negotiating on whether Greece has to abide by austerity measures to stay in the euro.
But Wait, There's More … and It's Arguably Even Worse
The worsening situation in Greece would be bad enough, but Spain seems to be in serious trouble as well. Spain has experienced a crushing housing bubble/bust cycle and unemployment is over 20% (and over 50% for younger workers). More than one in five Spaniards are out of work, and an increasing number have lost their homes as well.
Spain's banking system is badly in need of capital, perhaps more than $125 billion, but Spain's government is playing hardball. Spain is refusing to turn to existing bailout mechanisms, largely because the government does not want to be forced to accept the austerity measures that have not only made the Greek economic situation worse, but have also led most of the politicians who agreed to it to lose their jobs.
In essence, Spain is playing a game of chicken. While other European countries (most notably Germany) are insisting that Spain play by the previously-agreed-upon rules and take the austerity measures with the money, Spain seems to be betting that the catastrophic threat of letting the system collapse will ultimately force the other side to blink and give it the money it needs, without the conditions it doesn't want.
Not surprisingly, this is bad for business, bad for stocks (including major Spanish banks Santander and BBVA) and bad for markets. It is also increasingly threatening the stability of the entire euro system and the economies of the relatively stronger countries like Germany. German citizens appear to be increasingly re-evaluating the cost-benefit of propping up the euro system. As Portugal teeters toward the brink and Ireland appears to need more help, it has to be looking more and more like a never-ending drain on Germany's citizens.
The Bottom Line
Cynical pragmatism tells me that European leaders will launch a "Hail Mary" midnight plan to produce the capital that Spain needs to shore up its banks. Greece is a more interesting story; the eurozone can arguably survive the withdrawal of Greece now, and the recent turn towards more extremist politicians seems to have cost the country some friends outside of its borders.
All of that said, the fact remains that there are deep structural problems in many European countries that are still not being addressed. While austerity measures like cutting public pensions and government spending may sound good in the short-term, what these countries really need are far-reaching changes to their byzantine regulatory regimes, their sclerotic worker protection systems and generally protectionist policies. In short, a near total do-over of their basic economic systems.
Given how hard that would be in the best of times, investors in North America probably ought to hunker down and prepare for another summer of discontent, worry and periodic panic from Europe.