MONEY Markets

What the Greek Crisis Means for Your Money

Global markets seem safe enough for now, but a so-called “Grexit” could have unpredictable effects.

As government officials in Greece and the rest of the European Union continue to haggle over the terms of its bailout agreement, you may be wondering: Does this have anything to do with me?

If you are investing in a retirement account like a 401(k) or an IRA, the answer is likely “yes.” About a third of holdings in a fairly typical target-date mutual fund, like Vanguard Target Retirement 2035, are in foreign stocks. Funds like this, which hold a mix of stocks and bonds, are popular choices in 401(k)s.

Of those foreign stocks, only a small number are Greek companies. Vanguard Total International Stock (which the 2035 fund holds), for example, has only about 0.1% of assets in Greek companies. But about 20% of the foreign holdings in a typical target date fund are in euro-member countries, and if Greece leaves the euro, that could affect the whole continent.

What’s the worst that could happen? For one, investors and citizens in some troubled economies like Spain and Italy could start pulling their euros out of banks. Also, borrowing costs could go up, and that could hurt economic growth and weigh down stock prices. And if fear of European instability drives investors to seek out safe assets like U.S. Treasuries, then bond yields and interest rates could keep staying at their unusually low levels.

There are some market watchers who see a potential upside to the conflict over Greece, however.

“If you believe the euro is an average of its currencies, it could actually rise if Greece leaves,” says BMO Private Bank chief investment officer Jack Ablin. A higher euro would make European stocks more valuable in dollar terms.

Additionally, he says, if Athens is thrown into pandemonium, then it’s actually less likely other countries will want to follow Greece out of the currency union.

The Greek situation will also have an impact on the bond market. If fear of European instability drives investors to seek out safe assets like U.S. Treasuries, then many bond funds will do well, and yields and interest rates would stay at their unusually low levels.

Perhaps the most insidious thing right now, says Ablin, is uncertainty. Again, a Greek exit from the euro would be unprecedented, and that makes the effect unpredictable—and potentially very scary for the global market. So investors would be wise to keep in mind the possibility of “black swans,” a term coined by statistician Nassim Taleb to describe market events that seem unimaginable (like black swans used to be) until they actually occur.

TIME europe

Germany Says ‘Nein’ to Greece Bailout Request

Greece Prime Minister Alexis Tsipras listens to Greek President Karolos Papoulias during their meeting at Presidential Palace in Athens, Greece on Feb. 18, 2015.
Thanassis Stavrakis—AP Greece Prime Minister Alexis Tsipras listens to Greek President Karolos Papoulias during their meeting at Presidential Palace in Athens, Greece on Feb. 18, 2015.

Climb-down still leaves doubts in Germany that Athens is serious about implementing reforms

Greece caved in to pressure from the rest of the Eurozone Thursday and asked for an extension of its bailout program.

But euphoria in financial markets lasted less than two hours before the German finance ministry said the request wasn’t “substantial” and didn’t offer enough guarantees that it would continue to implement reforms.

Berlin’s rejection came barely an hour after Dutch finance minister Jeroen Dijsselbloem had confirmed that the Eurogroup’ (comprising the Eurozone’s 19 finance ministers) would meet again Friday in Brussels to discuss the request.

The statement was unusual in that, while Germany has traditionally led the group of creditors driving a hard line at bailout negotiations for six countries over the last five years, it has rarely done anything to pre-empt discussions so thoroughly.

A deal on Friday would buy time for the new Greek government to validate its promise of cracking down on corruption and collecting more taxes, particularly from the business elite that has successfully avoided them in the past. Greece’s government hopes it could then agree a new and less onerous deal with the creditors that would allow it to recover faster.

Greece’s €240 billion program is due to expire at the end of the month, after which it will lose access to over €10 billion ($11.5 billion) of aid. On Monday, the Eurogroup had given Greece an ultimatum on extending the deal, telling finance minister Yanis Varoufakis to either take it or leave it.

A text of the request published by Reuters Thursday indicated that the government pledged to abide by all its previous commitments and recognize the bailout as legally binding. However, the wording of its first point implied that Greece wants to haggle over implementing reforms demanded by the original bailout agreement–an impression reinforced this week as Prime Minister Alexis Tsipras promised to introduce new laws rolling back some of the agreement’s key provisions.

A spokesman for Germany’s finance ministry dismissed it as “not a substantial proposal for a solution. In reality, it aims for a bridging loan without fulfilling the demands of the program.”

Even so, the request is still a major climbdown for the new government, led by Tsipras’ radical left-wing Syriza party, which swept to power on a pledge to overthrow the bailout agreement in January and subsequently declared it “dead”. It pledges to honor all of Greece’s debts and, just as importantly, to continue accepting monitoring visits from the three institutions that have overseen Athens’ implementation of the bailout to date, the hated “troika” of European Central Bank, the International Monetary Fund and the European Commission.

The request comes less than a day after the ECB subtly, but nonetheless significantly, increased the pressure on Greece by voting only a minimal increase in the amount of cash that Greek banks can access from it.

Greeks have reportedly been pulling deposits out of the banking system in increasing numbers recently, scared at the prospect of their country being forced out of the Eurozone. The increase of only €3.3 billion in the ceiling on Emergency Lending Assistence might have left banks unable to honor requests for withdrawals. The banks are already effectively barred from the ECB’s regular lending operations because the ECB no longer considers Greek government debt as good enough collateral.

The German newspaper Frankfurter Allgemeine Zeitung had reported earlier Thursday that the ECB would rather impose capital controls on Greece than allow its banking system to continue being drained of resources. However, the ECB later denied this, saying that: “There was no discussion on capital controls in the Governing Council and any reporting on this is incorrect.”

This story updates an earlier version published before the German government issued its statement.

This article originally appeared on Fortune.com.

TIME Greece

Greece and Euro Zone Take Modest Steps to Bridge Differences

Irish Prime Minister Enda Kenny, right, speaks with Italian Prime Minister Matteo Renzi, left, and Greek Prime Minister Alexis Tsipras in Brussels Feb. 12, 2015
Michel Euler—AP Irish Prime Minister Enda Kenny, right, speaks with Italian Prime Minister Matteo Renzi, left, and Greek Prime Minister Alexis Tsipras in Brussels Feb. 12, 2015

An imminent deal still appears to be some way off

(BRUSSELS) — Greece and its creditors in the 19-country eurozone took visible, if modest, steps Thursday to bridge their differences over Athens’ demands to lighten the load of its bailout, but an imminent deal appears still to be some way off.

Following weeks of haggling, the two sides made a series of encouraging noises at a summit of European Union leaders and even agreed to start technical discussions to inform a meeting of the eurozone’s finance ministers Monday. Investors are hopeful that a deal will be reached to avoid Greece’s exit from the euro — Greece’s main stock market closed about 6.7 percent higher Thursday.

“Europe always has been geared towards finding compromises,” said German Chancellor Angela Merkel. “Compromises are agreed when the advantages outweigh the disadvantages. Germany is ready for this.”

Merkel has faced a barrage of criticism in Greece for being the key cheerleader of the austerity policies that Greek Prime Minister Alexis Tsipras wants to consign to history. The Greek leader came to power last month on a promise to scrap the country’s bailout in favor of a new, lighter program. Despite the tensions surrounding their meeting, the two leaders exchanged warm greetings, holding each other by their elbows, and chatting amiably, if briefly.

Tsipras expressed his hope that a “mutually acceptable” debt deal can be secured next week at the eurogroup meeting and spoke in language that would likely cheer many of the skeptics in the eurozone.

“The Greek delegation will take part in these meetings with crystal clear proposals and we will try and convince, not blackmail, our partners about our proposals,” he said. “Our program will respect European rules …. we will keep balanced budget, respect the fiscal rules of the EU. We don’t want to go back to era of deficits.”

Tsipras also said his government will propose a set of reforms particularly dealing with the “shortcomings of the Greek state” such as corruption and tax evasion.

“The spirit that prevails in the European Union is a spirit of compromise to the benefit of all the parties,” he said.

In essence, the Greek government has said it won’t extend the current bailout program and its associated austerity and wants to negotiate a new bridge program that will tide Greece over the coming months and prevent a damaging exit from the euro. Tsipras and his left-wing Syriza party blame the current policies of budget austerity for choking Greece’s economy.

Despite a recent modest return to growth, the Greek economy is around 25 percent smaller than it was before the crisis and poverty and unemployment have swelled. Greece is lumbered by huge debts, which stand at around 175 percent of GDP, and it has repayments this year that it will have trouble meeting without outside help.

“The transition to a new program is the main subject of our negotiation,” he said. “The medicine that Greece has taken with this fiscal consolidation has devastated this country. This (the bailout) is over, forget it, it no longer exists.”

Without an agreed new program, Greece faces bankruptcy — and a possible exit from the eurozone, a development that would damage Greece’s economy, at least in the short-term, and throw global financial markets into turmoil.

Earlier, Tsipras following a conversation with Jeroen Dijsselbloem, the head of the eurogroup of finance ministers, agreed to allow representatives from his government to meet Friday with those from the European Commission, European Central Bank and International Monetary Fund to discuss technical matters regarding Greece’s current bailout. The findings will inform Monday’s eurogroup meeting, the last scheduled one before Greece’s bailout program expires after Feb. 28.

Dijsselbloem said he hoped, at the very least, that the discussions will clearly illustrate the issues, the extent of the differences between the two sides and “whether we could adjust the current program, put in the new ambitions and ideas of the Greek government, and still have a viable program to work on over the next months.”

However, he sought to downplay expectations that a deal on Monday would be ready to be signed.

“Let me seriously douse your expectations on that point,” he said. “It really will be difficult. We are politically far apart.”

It seems that Europe’s leaders are open to tweaking the policy requirements of the bailout to deal with the new Greek government’s priorities. However, they will want to see offsetting measures to increases in the minimum wage, say.

“A measure that is annulled must be replaced with another that has the same budgetary, fiscal impact,” said Jean-Claude Juncker, the president of the EU’s executive branch, the Commission. “It is on that basis that we will try to find an agreement over the coming days.”

Many of Greece’s European creditors, particularly Germany, are hesitant to give in to Greece too easily for fear of setting a precedent for countries that run up excessive debts. The 240 billion euros (currently $272 billion) in rescue loans Greece is getting come from taxpayers in other countries.

Many analysts think Europe will once again achieve a deal at the last-minute, with Greece agreeing to a bailout extension provided the required budget austerity measures are eased and Greece implements reforms.

TIME energy

EU Pushes For Greater Integration Into an Energy Union

european-union-flag
Getty Images

While main stumbling block for the effort appears to be merely an engineering challenge, the bigger obstacle is political

European nations met in Latvia last Friday to devise a strategy to unify their energy sectors.

The Feb. 6 meeting in Riga by European Union energy ministers sought to find ways to increase interconnections across the continent to better insulate countries from dependence on Russia for natural gas. It also hopes to support new and cleaner generation – the EU has passed ambitious energy and climate goals for 2030, but still lacks the legal framework to achieve those goals, as the IEA noted in a 2014 report.

One of the main stumbling blocks to a European-wide “energy union” is the dearth of high-voltage transmission lines and major natural gas pipelines that traverse multiple countries.

While that appears to be merely an engineering challenge, the bigger obstacle is political. As with much of EU policy, national governments are reluctant to forgo sovereign power for the sake of EU goals.

But, the EU hopes that the summit will mark “the time when we finally move away from 28 national policies,” as European Commission Vice President Maros Sefcovic put it. The EU Commission will publish its strategy on Feb. 25.

European nations have made some progress over the past year. In 2014, Lithuania inaugurated a new liquefied natural gas (LNG) import terminal, which opened up Baltic nations to a vital new source of natural gas. Lithuania’s LNG import terminal gave it another option to Russian gas, and the small Baltic country used that enhanced leverage to win price concessions from Russia.

But with about one-third of EU gas coming from Russia – and Eastern Europe’s share is easily double that percentage – more needs to be done.

“We need to pool our resources, combine our infrastructures and unite our negotiating power vis-à-vis third countries,” European Commission President Jean-Claude Juncker said as part of his opening statement to European Parliament after his election. Juncker wants the energy union to act as a block to give Europe more sway when negotiating energy deals with outsiders.

The central pillar of the energy union, however, is a focus on more gas connections. There has been a stepped up effort on bidirectional gas flows to provide Eastern Europe with a safety valve in the event of a supply disruption.

Moreover, after years of political gamesmanship and regional jockeying, the EU has settled on a two-section gas pipeline that will connect Caspian gas from Azerbaijan to central Europe, cutting out Russia from Europe’s southern corridor. The Trans-Anatolian pipeline (TANAP) will start at the Caspian Sea and run the length of Turkey, hooking up with the Trans-Adriatic pipeline, which will take the gas from there on to Italy. The project should be completed by the end of the decade.

Beyond new gas supplies, the EU wants to liberalize electricity markets and unify rules across member nations. They have tried this before – electricity and gas markets were supposed to have been liberalized by 2007 according to a past EU directive, but there has been a lot of foot-dragging. That is because different states have different priorities and an EU energy union is not necessarily in the interest of key players at the national level. As The Economist noted in a Jan. 17 article, linking up Spanish wind power is something that French nuclear operators might resist.

In fact, it is not clear how the EU is going to overcome a lot of national turf battles. Some countries have regulated electricity pricing, others do not. Some are linked to their neighbors, others are not. Some prioritize clean energy, others put fossil fuels at the top of their agenda.

At its core, the European “energy union” will mean more Europe, which is something that may not be palatable in many countries these days. Anti-EU sentiment is rising – UKIP in the UK, Syriza in Greece, along with anti-EU factions on the right and left in Germany, France, Spain and others. The EU Commission will face an uphill battle.

This article originally appeared on Oilprice.com.

TIME russia

Russia Says It Would Consider Financial Help for Greece

Russian Federation Council member Anton Siluanov delivers a speech as Russian Federation Council deputy chairman Ilyas Ukhmanov, Russian Federation Council chairperson Valentina Matviyenko, Russian Federation Council deputy chairmen Evgeny Bushmin and Yuri Vorobyov (L to R, background) look on at a plenary meeting of the Russian Federation Council on Jan. 28, 2015.
Pitalev Ilya—ITAR-TASS Photo/Corbis Russian Federation Council member Anton Siluanov delivers a speech as Russian Federation Council deputy chairman Ilyas Ukhmanov, Russian Federation Council chairperson Valentina Matviyenko, Russian Federation Council deputy chairmen Evgeny Bushmin and Yuri Vorobyov (L to R, background) look on at a plenary meeting of the Russian Federation Council on Jan. 28, 2015.

Finance minister says Russia hasn't yet received a request for assistance

Russia’s finance minister said his country would consider providing financial support to Greece, raising the stakes for the European Union as it confronts the new Euroskeptic reality in Athens.

Anton Siluanov told CNBC that Russia has not received a request from Greece for assistance, but his comments come days after the anti-E.U. party Syriza won parliamentary elections, vowing to renegotiate aid packages from the bloc that are tied to strict austerity measures.

“We can imagine any situation, so if such petition is submitted to the Russian government, we will definitely consider it,” he said, “but will take into account all the factors of our bilateral relationships between Russia and Greece, so that is all I can say.”

The Greek government’s clash with the E.U. over its debt risks cutting the country off from euro zone lenders and private investors. That could create an opening for Russia to expand its influence in Greece—an ugly prospect for the E.U. as it engages in a sanctions battle with Russia over the conflict in Ukraine.

E.U. foreign ministers agreed on Thursday to impose a new round of sanctions, according to the Associated Press, apparently overcoming for now concerns from the new Greek government about expanding the rift between the EU and Russia.

[CNBC]

MONEY Greece

What the Turmoil in Greece Means for Your Money

The head of radical leftist Syriza party Alexis Tsipras waves to supporters after winning the elections in Athens January 25, 2015. Tsipras promised on Sunday that five years of austerity, "humiliation and suffering" imposed by international creditors were over after his Syriza party swept to victory in a snap election on Sunday.
Marko Djurica—Reuters The head of radical leftist Syriza party, Alexis Tsipras.

Expect lower stock prices.

Faced with an apocalyptic unemployment rate of 28%, voters in Greece have drawn the line on austerity measures that have mired the country in a crisis rivaling that of the Great Depression. In the worst case, the move could lead to Greece’s exit from the European monetary union. In the best case, it will produce much-needed debt relief for the country’s ailing economy. But either way, it’s prudent to assume the turmoil will roil equity markets both here and abroad.

The issue came to a head earlier this week when Greece’s “radical left” Syriza party won a plurality of votes in the latest election. Led by 40-year-old Alexis Tsipras, Syriza campaigned on a platform to ease the “humiliation and suffering” caused by austerity. This includes debt relief and rolling back steep spending cuts enacted by Greece’s former government in exchange for financing from the International Monetary Union and other members of the European Union.

To say Greece has paid dearly for these cuts would be an understatement. The consensus among mainstream economists is that austerity during a time of crisis exacerbates the underlying issues. We saw this in Germany after World War I when France and Great Britain demanded it pay colossal war reparations. We saw it throughout Latin America following the IMF’s structural adjustments of the 1980s and 1990s. And we’re seeing it now in Greece and Spain, where unemployment has reached levels not seen in the developed world since the Great Depression.

The problem for Greece is that Germany and other fiscally conservative European countries aren’t sympathetic to its predicament. They see Greece’s travails as its just deserts. They see a fiscally irresponsible country that exploited its membership in the continent’s monetary union in order to borrow cheaply and spend extravagantly. And they see an electorate that isn’t willing to accept the consequences of its government’s actions.

To a certain extent, Greece’s critics are right. Over the last decade, its debt has ballooned. In 2004, the country’s debt-to-GDP ratio was 97%. Today, it is 175%. This is the heaviest debt load of any European country relative to output.

It accordingly follows that the European Union stands once again at the precipice of fracturing. If the Syriza party sticks to its demands and Greece’s neighbors won’t agree to relief, then one of the few options left on the table will be for Greece to exit the monetary union and abandon the euro. Doing so would free the country to pursue its own fiscal and monetary policies. It would also almost inevitably trigger a period of sharp inflation in a reinstituted drachma.

This isn’t to say global investors should be petrified at the prospect of even the most extreme scenario — that of Greece abandoning the euro. In essence, the euro is nothing more than a currency peg that fossilized the exchange rates between the continent’s currencies in 2001. By going off it, Greece would essentially be following in the footsteps of the Swiss National Bank, which recently unpegged the Swiss franc from the euro after a drop in the latter’s value made maintaining the peg prohibitively expensive.

A more complicated question revolves around the fate of Greece’s sovereign debt. Seceding from the monetary union won’t eliminate its obligations to creditors. It likely also won’t change the fact that the country’s debt is denominated in euros. Thus, if Greece were to exit the euro and experience rapid inflation, the burden of its interest payments would get worse, not better. This would make the prospect of default increasingly attractive if not necessary in order to reignite economic growth.

But investors have shouldered sovereign debt repeatedly since the birth of international bond markets. Just last year, Standard & Poor’s declared that Argentina had defaulted after missing a $539 million payment on $13 billion in restructured bonds — restructured, that is, following the nation’s 2002 default. Yet stocks ended the year up by 11.5%. The same thing happened when Russia defaulted in 1998. Despite triggering the failure of Long Term Capital Management, a highly leveraged hedge fund that was ultimately rescued by a consortium of Wall Street banks, stocks soared by 26.7% that year.

Given all this, the biggest impact on investors, particularly in the United States, is likely to make its way through the currency markets. When fear envelopes the globe, investors flee to safety. And in the currency markets, safety is synonymous with the U.S. dollar. Over the last year, for instance, speculation about quantitative easing by the European Central Bank, coupled with the scourge of low oil prices on energy-dependent economies such as Russia and Mexico, has increased the strength of the dollar. This will only grow more pronounced if the U.S. Federal Reserve raises short-term interest rates later this year.

The net result is that American companies with significant international operations will struggle to grow their top and bottom lines. This is because a strong dollar makes American goods more expensive relative to competitors elsewhere. Consumer products giant Procter & Gamble PROCTER & GAMBLE COMPANY PG 0.33% serves as a case in point. In the final three months of last year, P&G’s sales suffered a negative five percentage point impact from foreign exchange. As Chairman and CEO A.G. Lafley noted in Tuesday’s earnings release:

The October [to] December 2014 quarter was a challenging one with unprecedented currency devaluations. Virtually every currency in the world devalued versus the U.S. dollar, with the Russian Ruble leading the way. While we continue to make steady progress on the strategic transformation of the company — which focuses P&G on about a dozen core categories and 70 to 80 brands, on leading brand growth, on accelerating meaningful product innovation and increasing productivity savings — the considerable business portfolio, product innovation, and productivity progress was not enough to overcome foreign exchange.

With this in mind, it seems best to assume revenue and earnings at American companies will take a hit while Europe works toward a solution to Greece’s problems. In addition, as we’ve already started to see, the hit to earnings will be reflected in lower stock prices. There’s no way around this. But keep in mind that we’ve been through countless crises like this is in the past, and the stock market continues to reward long-term investors for their patience and perseverance.

TIME Greece

5 Facts About the Greek Elections

Greek Prime Minister and Syriza party leader Alexis Tsipras, at the Presidential palace during the swearing in ceremony of the new Greek Government, Athens, Jan. 27, 2015 .
Panayiotis Tzamaros/NurPhoto/Corbis Greek Prime Minister and Syriza party leader Alexis Tsipras, at the Presidential palace during the swearing in ceremony of the new Greek Government, Athens, Jan. 27, 2015 .

The results of Sunday's elections in Greece pose major challenges to Europe

On Sunday, Greek elections ushered in a radical left-wing Syriza government in sweeping fashion: the party won 149 seats—two short of an absolute majority—on the back of its anti-establishment, anti-austerity platform. How dissatisfied are Greeks with the status quo? How does that compare with Germany, heading into tense negotiations over the southern European country’s debt? And where can Greece turn for support? Here are five facts that explain the situation.

1. Surging discontent

In 2010, Syriza was polling at 5%. In last weekend’s elections, they captured more than 36% of the vote. Meanwhile, Golden Dawn, an anti-immigration party with neo-Nazi associations, took third place with 6%. Perhaps a different poll best explains this surge in support for anti-establishment parties. In a Pew Research survey measuring economic attitudes, Greece came dead last among all countries polled: just 2% of Greeks think their economic situation is good. (Compare that to the 85% of Germans who are happy with their economy.)

(Eurasia Group, Pew Research)

2. 25%: Greece’s unlucky number

Why so much frustration with the economy? Since the financial crisis struck in 2008, the Greek economy has shrunk by more than 25%. So have wages. The unemployment rate is over 25% too. Youth unemployment is double that, rising to 50.6% in October. (Compare that to 7.4% youth unemployment in Germany.)

(Los Angeles Times, the Guardian, the European Magazine, Trading Economics)

3. Under pressure

When Greece inked a historic bailout worth $270 billion dollars, or some $25,000 per Greek citizen from the Troika—the International Monetary Fund, the European Commission and the European Central Bank—it came with a quid pro quo. The government has undertaken drastic cuts in government spending to try to balance the budget. Education funding has been decimated: over six years of austerity, the Ministry of Education’s budget has been slashed by more than 35%. The pain adds up: the University of Crete endured a budget cut of 75% in 2011, an additional 15% the following year—and a 23% cut is scheduled for this year. Syriza’s argument—that such cuts are a bad bet for Greece’s future and will undermine longer term growth—resonates with the broader Greek population.

(CNBC, European Parliament)

4. Brain drain

With the numbers so bleak, it’s no wonder Greeks are leaving in droves. Migration outflows are up 300% compared to pre-crisis figures; roughly 2% of the population has left, some 200,000 people. Somewhat ironically, over half of these emigrants have headed for Britain—and for Germany. Since 2010, more than 4,000 Greek doctors have left the country for jobs abroad.

(The Guardian, NPR, Deutsche Welle)

5. Pivot to Russia?

Greece has had a little help from a friend outside the EU. In 2013, Russia surpassed Germany to become Greece’s largest trading partner, with trade flows of $12.5 billion. Tourism is a huge part of the Greek economy, contributing over 16% of GDP—and Russia has been the fastest growing source of new visitors. In 2013, tourism revenues from Russia skyrocketed 42%. Of course, recent Western sanctions undermine this budding relationship—a weaker ruble means less tourism, and Russia’s EU food export ban hurts Greek fruit exporters. This could explain why new Greek Prime Minister Alexis Tsipras met with the Russian ambassador to Greece within hours of taking office—and publicly expressed his disapproval with new EU condemnations of Russia.

(Bloomberg, the OEC, EU Observer)

Foreign-affairs columnist Bremmer is the president of Eurasia Group, a political-risk consultancy. His next book, Superpower: Three Choices for America’s Role in the World, will be published in May

TIME Economy

Europe’s Economic Band-Aid Won’t Cure What Really Ails It

Prime Minister David Cameron Tries To Take A Harder Line with Europe
Carl Court—Getty Images E.U. flags are pictured outside the European Commission building in Brussels on Oct. 24, 2014

Quantitative easing is a good start, but it won't fix the Continent's underlying wounds

Markets always love a money dump, which is why European stocks are now rallying on news that the European Central Bank will purchase 1.1 trillion worth of euro-denominated bonds between now and September 2016. Bond yields are dropping, implying less risk in the European debt markets. And the value of the euro itself is falling, which should make European exports more competitive, which could in turn bolster the European economy over all.

All good, right? For now, yes, it is all good.

But let’s remember that central bank quantitative easing (QE) of the kind that Europe is now embarking on is always just a Band-Aid on economic troubles, not a solution to underlying structural issues in a country (or in this case, a region). Just as the Fed’s $4 trillion QE money dump bolstered the markets but didn’t fix the core problems in our economy—growing inequality, a high/low job market without enough work in the middle, flat wages, historically low workforce participation—so the ECB QE will excite markets for a while, but it won’t mend the problems that led Europe to need this program to begin with.

Those consist primarily of a debt crisis stemming from the lack of real political integration within the EU. Right now, Europe has a currency and an economic union that exists in a kind of fantasy land, with no underlying political unity. Until the Germans start acting more European (meaning creating a consumption society and realizing that they’ll have to do some fiscal transfers to struggling peripheral nations in exchange for the huge export benefits they get from the euro), and countries like Spain, Italy, Portugal and France start making the changes they really need (all the usual stuff—labor market reforms, cutting red tape, fighting corruption, opening up service markets), the debt crisis won’t go away.

Indeed, the challenge now is for countries is to use the breathing room that the ECB has given them to really come together over the next 18 months and make those reforms happen while committing to a truly integrated Europe. Germany should say it will unequivocally back peripheral nations financially in exchange for a promise of real reforms in those nations. (There should also be tough penalties for failure on both sides of the bargain.)

That will be tough for sure, but Europe will find itself in an even worse place come September 2016 if it doesn’t take action now. Post QE, without any real structural reform, the EU will simply have an even more bloated balance sheet, and the market will exact punishment for it. For a historical lesson on this, look to the many emerging market crises of the past where countries tried to spend themselves out of their problems without doing underlying reforms; it always ends in a stock market crash, a financial crisis, and plenty of tears.

The buck has stopped for Europe. The ECB has called policy makers’ bluff. It’s time to create a real United States of Europe to match the common currency.

TIME France

5 Facts That Explain the Charlie Hebdo Attack

People gather to pay respect for the victims of a terror attack against a satirical newspaper, in Paris, Jan. 7, 2015.
Thibault Camus—AP People gather to pay respect for the victims of a terror attack against a satirical newspaper, in Paris on Jan. 7, 2015.

Immigration figures, unemployment numbers and an unpopular President all offer context to a terrorism attack

Wednesday’s attack on magazine Charlie Hebdo shocked France, but tensions with the country’s Muslim immigrant population have been building for years. It looks like these attacks were motivated by anger among Muslim militants that the newspaper had published cartoon images that mocked the Prophet Muhammad. There is no political or demographic trend that can explain such a cold-blooded murder, but the statistics below tell a disturbing story about how this crime will exacerbate already high tensions in France and across Europe, making life still more difficult for Muslim immigrants.

1. All-time highs for migration
Rising anti-immigration sentiment in France comes at a time of historic levels of human movement. There are now more than 50 million people around the world displaced by violence, the highest number at any time since World War II. All of this refugee movement is being felt along Europe’s borders. Frontex, the E.U.’s border agency, estimates that 270,000 people tried to enter Europe illegally last year, shattering the previous high of 141,000 in 2011, the year of the Arab Spring. In 2014, more than 3,000 migrants died in their attempts to reach Europe.

(Los Angeles Times, Frontex via CNN, Frontex via the Telegraph)

2. Painful economic realities … and misconceptions
Youth unemployment in France is over 24%. As high as that figure may be, another troubling statistic surpasses it. The average person in France believes that 31% of the population is Muslim; in reality, the figure is 7.7%. (Yet, even this much-smaller-than-believed Muslim population is still the largest in Europe.)

(Eurostat, IPSOS MORI, Bloomberg)

3. Anti-immigration goes mainstream
Approval for Marine Le Pen’s Front National, an anti-E.U., anti-immigration party, has steadily risen. In 2010, 18% in France said they agree with the party’s ideas. That number has grown each year since, reaching an all-time high of 34% in the most recent TNS Sofres poll. In European parliamentary elections back in May, the Front National took first place in France with 25% of the vote.

(TNS Sofres , Ifop via Le Figaro, BBC)

4. All-time lows for a French President
President François Hollande’s approval ratings have dipped as low as 12%, the lowest tally ever for a French President. (According to more recent figures, they’ve “rebounded” to 15%.) The President has pledged to step down and not seek re-election in 2017 if he can’t curb unemployment. Currently at 11%, the unemployment rate is almost higher than his approval ratings.

(BBC, France24)

5. Passports — and lack thereof
As of August 2013, France had the third longest wait time in Europe for immigrants seeking naturalization: an average of 14 years. According to U.S. counterterrorism officials, there are more than 3,000 ISIS recruits believed to hold Western passports.

(Los Angeles Times, France24)

TIME World

These Are the Top 10 Geopolitical Risks of 2015

Protesters hold a banner as they march during a demonstration against the visit of Germany's Chancellor Angela Merkel on April 11, 2014 in Athens.
Milos Bicanski—Getty Images Protesters hold a banner as they march during a demonstration against the visit of Germany's Chancellor Angela Merkel on April 11, 2014 in Athens.

TIME foreign affairs columnist Ian Bremmer provides a guide to the global storylines of the year, beginning with an unstable Europe

International stories rise and fall so quickly in today’s media. On Monday, it’s civil conflict in Ukraine. On Tuesday, it’s the rise of the Islamic State of Iraq and Greater Syria (ISIS). By Wednesday, the headlines are on to something else. Amid the global whiplash, it’s easy to lose sight of the larger picture. So as the new year begins, it’s useful to take a broader look at where these stories are headed—and to track the next wave of market-moving surprises in international politics.

Every January Eurasia Group, the political risk consultancy I founded and oversee today, publishes Top Risks, a roundup of the geopolitical trends we consider most likely to change our world in the coming year. This ranking reflects our forecast of which global storylines are most likely to play out over the next 12 months, which will have biggest impact on the markets and politics—and where we can expect surprises.

In 2015, political conflict among the world’s great powers is in play more than at any time since the end of the Cold War. U.S. relations with Russia are now fully broken. China’s powerful President Xi Jinping is creating a new economy, and the effects will be felt across East Asia and the rest of the world. Geopolitical uncertainty has Turkey, the Gulf Arab states, Brazil and India hedging their bets.

But the year’s top risk is found in once placid Europe, where an increasingly fractured political environment is generating new sources of conflict.

1. The politics of Europe

European economics aren’t as bad as they were at the height of the eurozone crisis in 2012, but the politics of the continent are now much worse. Within key countries like Britain and Germany, anti-EU political parties continue to gain popularity, undermining the ability of governments to deliver on painful but needed reforms. Friction is growing among European states, as peripheral governments come to increasingly resent the influence of a strong Germany unchecked by weak France or absent Britain. Finally, a resentful Russia and an aggressive ISIS will add to Europe’s security worries.

2. Russia

Sanctions and lower oil prices have weakened Russia enough to infuriate President Vladimir Putin, but not enough to restrain his actions. Moscow will continue to put pressure on Ukraine, and as a result, U.S. and European sanctions will tighten. As Russia’s economy sags, Putin’s approval ratings will depend increasingly on his willingness to confront the West. Western companies and investors are likely targets—on the ground and in cyberspace.

3. The effects of China slowdown

China’s economic growth will slow in 2015, but it’s all part of Xi’s plan. His historically ambitious economic reform efforts depend on transitioning his country to a consumer-driven economic model that will demand levels of growth that are lower, but more sustainable. The continuing slowdown should have little impact inside China. But countries like Brazil, Australia, Indonesia and Thailand, whose economies have come to depend on booming trade with a commodity-hungry China, will feel the pain.

4. The weaponization of finance

For the moment, the American public has had enough of wars and occupations, but the Obama administration still wants to exert significant influence around the globe. That’s why Washington is weaponizing finance on a new scale. The U.S. is using carrots (access to capital markets) and sticks (varied types of sanctions) as tools of coercive diplomacy. The advantages are considerable, but there is a risk that this strategy will damage U.S. companies caught in the crossfire between Washington and targeted states. Transatlantic relations could suffer for the same reason.

5. ISIS, beyond Iraq and Syria

ISIS faces military setbacks in Iraq and Syria, but its ideological reach will spread throughout the Middle East and North Africa in 2015. It will grow organically by setting up new units in Yemen, Jordan, and Saudi Arabia, and it will inspire other jihadist organizations to join its ranks—Ansar Bayt al Maqdas in Egypt and Islamists in Libya have already pledged allegiance to ISIS. As the militant group’s influence grows, the risk to Sunni states like Saudi Arabia, the United Arab Emirates and Egypt will rise.

6. Weak incumbents

Feeble political leaders, many of whom barely won reelection last year, will become a major theme in 2015. Brazil’s Dilma Rousseff, Colombia’s Juan Manuel Santos, South Africa’s Jacob Zuma, Nigeria’s Goodluck Jonathan and Turkey’s Recep Tayyip Erdogan will each face determined opposition and formidable obstacles as they try to enact their political agendas.

7. The rise of strategic sectors

Global businesses in 2015 will increasingly depend on risk-averse governments that are more focused on political stability than on economic growth, supporting companies that operate in harmony with their political goals and punishing those that don’t. We’ll see this trend in emerging markets, where the state already plays a more significant role in the economy, as well as in rogue states searching for weapons to fight more powerful governments. But we’ll also see it in the U.S., where national security priorities have inflated the military industrial complex, which now includes technology, telecommunications and financial companies.

8. Saudi Arabia vs Iran

The rivalry between Shiite Iran and Sunni Saudi Arabia is the engine of conflict in the Middle East. Given the growing reluctance of Washington and other outside powers to intervene in the region, increasingly complex domestic politics within these two countries and rising anxiety about the ongoing negotiations over Iran’s nuclear program, we can expect Tehran and Riyadh to use proxies to fuel trouble in more Middle Eastern countries than ever in 2015.

9. Taiwan/China

Relations between China and Taiwan will deteriorate sharply in 2015 following the opposition Democratic Progressive Party’s landslide victory over the ruling Nationalist Party in local elections this past November. If China decides that its strategy of economic engagement with Taiwan has failed to advance its ultimate goal of reunification, Beijing might well backtrack on existing trade and investment deals and significantly harden its rhetoric. The move would surely provoke public hostility in Taiwan and inject even more anti-mainland sentiment into the island’s politics. Any U.S. comment on relations between China and Taiwan would quickly increase resentment between Beijing and Washington.

10. Turkey

Lower oil prices have helped, but President Erdogan has used election victories in 2014 to try to sideline his political enemies—of which there are many—while remaking the country’s political system to tighten his hold on power. But he’s unlikely to win the authority he wants this year, creating more disputes with his prime minister, weakening policy coherence and worsening political unpredictability. Given the instability near Turkey’s borders, where the war against ISIS rages, that’s bad news. Refugees from Syria and Iraq are bringing more radicalism into the country and adding to economic hardship.

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