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Springtime in Europe

09/13/2012

This Spring, things were improving rapidly in Europe.  The ECB had instituted its Long-Term Refinancing Operation (LTRO) program that essentially gave banks a new three-year funding mechanism or three year “lease-on-life.”  Interest rates started falling.  Their stock markets were rising.  Optimism bloomed!

Then, it all fell apart . . .

This Fall, things are again improving rapidly in Europe.  The German Supreme Court didn’t kill the European Stability Mechanism (ESM).  The European Commission has asked the ECB to supervise all European banks, which is another loss of sovereignty by each member.  The ECB has said it would start buying bonds of member nations, a type of quantitative easing.  Dutch voters approved more political integration.  Their stock markets are all up.  Optimism is blooming again.

And, I expect it will all fall apart again . . .

Nowhere is the problem of entitlements being addressed!  The debt of these nations reflects their level of entitlements.  Even Greece, who was the first country to enter the crisis, has barely touched their level of entitlements.  It took them a full year before they fired one single government employee.

To an economist, the problem is clear.  Entitlements must decline and discretionary spending must decline and taxes rise in some combination.  Eliminating discretionary spending like infrastructure in order to maintain entitlement spending is counter-productive, just as eliminating discretionary spending in order to maintain tax breaks are also counter-productive.

Entitlements are like herpes — once you have it, you have it always, unfortunately.

So, I don’t believe all the optimism blooming in Europe.  We’ve seen this movie before.

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