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buffalonate (94.07)

Euro Pact Is Purely A Marketing Ploy.

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December 12, 2011 – Comments (3)

The markets recently celebrated Europe's latest attempt to solve the debt crisis.  This caused a couple days of relief until people realized that the pact didn't go nearly far enough to solve the problem.  Basically the pact says that each country in the European Union has to keep its deficit under 3% of gdp.  To provide perspective for us it would mean we couldn't go over a $450 billion annual deficit.  That is a decent start to austerity but it doesn't go nearly far enough to end their crisis.  The pact also wouldn't even be enacted for 3 months.  The agreement also pushes up the timeline of the permanent bailout fund by a year.  The problem is that Italy and Spain have huge amounts of debt that will need to be sold in the next few months and that bailout fund will not be available to help yet.  That tells me that the next few months will get really ugly because there is not enough money available at the IMF or the EFSF to provide all the loans these two countries will need.

Europe keeps hoping that they won't need to make serious cuts to solve their problems.  They continue to hope that they can grow their way out of this crisis.  The problem with that idea is that there is a lack of confidence in these governments' ability to solve their problems.  Without confidence that the govt will solve the problem businesses will not invest in their businesses.  They are far more likely to just hoard their cash and prepare for doomsday.  Unless Europe makes much more serious attempts at forcing each other to reduce their deficits or they allow the ECB to print money at will this crisis will never end.  Germany won't allow the ECB to print money at will so eventually a hybrid of the two will have to occur.  I believe Germany will come to a compromise where they will allow the ECB to print as much money as is necessary but only if a country reduces its deficit to gdp to under 2%.  I believe this is the only real solution to the problem but it will take Europe forever to agree on this solution.  So until then I will be going short after every rally.

3 Comments – Post Your Own

#1) On December 12, 2011 at 4:06 PM, materialsman92 (34.83) wrote:

I don't understand how European believe they are going to get out of this crisis taking on more debt and at the same time having severe austerity which contracts the economy. How is one to pay for more debt if the economy is contracting? I don't understand the reasoning here, they are just making matters worse for themselves.

I agree with you buffalonate I think Germany will ultimately have to resort to an ECB printing press but this will not happen until the profligate nations have their budgets reviewed and regulated by a European board of overseers. There is also the possibility that weak Euro nations like Greece, that fail to meet certain requirements, exit the euro soon. Just hopefully, I find this unlikely but possible, it's not a big one like Italy or Spain.

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#2) On December 13, 2011 at 2:05 AM, portefeuille (99.61) wrote:

Basically the pact says that each country in the European Union has to keep its deficit under 3% of gdp.

not really ...

see here.

http://consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/126658.pdf

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#3) On December 13, 2011 at 11:05 AM, buffalonate (94.07) wrote:

They want Europe to have a structural deficit of under .5% but there is no enforcement mechanism unless they get over 3% deficit to gdp.  So basically the .5% goal is meaningless.  Good luck trying to get Europe to balance their budgets.  Their unions would go nuts.

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