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business newsEurope Is Going Down
By
James Kostohryz
May 13, 2010 1:00 pm
Trying to apply the IMF austerity formula simultaneously to the EU countries is a recipe for disaster.
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Yesterday’s celebration by global financial markets of the austerity measures announced by Spain is utter madness!
The German press yesterday was filled with similar announcements of massive budget cuts in Germany.
It appears that the EU is going on a synchronous binge of IMF-style budgetary slash and burn.
To me, these announcements have sealed the deal: Europe is going down. Hard.
In the context of the synchronous Europe-wide recession that such austerity will almost certainly provoke/deepen, Europe cannot possibly meet its growth and revenue goals. The current baseline GDP estimates are hopelessly optimistic.
In another day and age, it would have been possible to imagine one or two EU countries pulling off a recovery plan based on fiscal austerity. This was the IMF recipe (which, by the way, had a pretty terrible track record, even back in the days of global prosperity in the '80s and '90s). Trade-based demand from growing countries can help pull the struggling country out of recession through export-led growth (aided by devaluation). Furthermore, in the context of general prosperity, a country doing some fiscal housecleaning could attract excess savings from the global financial system.
However, the notion that the 20+ countries in the EU can simultaneously go on an austerity plan, maintain a fixed exchange rate between them, and, in this manner, spur confidence and growth, is insane. It's the principle of extrapolation, gone wild. EU countries all export to one another and they all use the same currency; who is going to pull whom out? And in terms of financing, there are no excess funds to go around. They all have huge deficits and they have to borrow from abroad.The situation in Europe has become zero sum. The ability of some to pull through will depend upon capturing resources through the trade and capital accounts that will insure that others will not be able to pull through.
How long will it take markets to figure this out and blow this whole thing to smithereens -- spiking sovereign spreads and crashing equity markets and sliding Euro -- I'm not sure.
But I'm growing increasingly convinced that a severe Europe-wide recession is a near certainty, and that financial, monetary, and political chaos have become probable.
I continue to gradually build a short book focused on Europe and Europe-sensitive investments. I'm doing it gradually because I'm not sure exactly when the impossibility of what the Europeans are trying to do will be come clear to enough people.
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No positions in stocks mentioned.
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