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Streetwise Professor

January 14, 2013

Fools Paradise

Filed under: Economics,Financial Crisis II,Politics — The Professor @ 9:24 pm

Europe seems to be challenging Alfred E. Newman-”What, us worry?” Draghi and the EU have papered over-I am tempted to say “literally”-the immediate financial issues pressing on Spain and Italy.  Given the respite from panic, the Europhoria seems to have taken over.

But the fundamentals are still abysmal.  European unemployment hit all time highs-over 11 percent across the Eurozone, 20+ percent in some countries, and 50+ percent in some demographics-notably younger working age individuals-in countries like Spain and Greece.  Greeks are reenacting a Mediterranean version of post-WWI Vienna, venturing into the forests to collect firewood.  Spain has stuffed its banks and pension funds with government debt-they have no capacity to absorb any more. Given the parlous state of the banks (Bankia is apparently billions of euros underwater), and the dire straits of the Spanish economy, it’s hard to see all of Draghi’s paper keeping out the gales of reality for long.  Add to that the continuing move of Catalonia towards independence, or at least greater autonomy, it is evident that the downside risks are huge.

Meanwhile, France is sputtering-to put it generously-under Hollande’s socialist government.  Growth is moribund-French economists have opined the the government’s point 8 percent growth forecast is overly optimistic.  Capital is fleeing.  The tax-and-spend approach is almost certainly going to condemn the country to stagnation, at best.

Meanwhile, with all going so well at home, France is intervening aggressively in Mali, with mixed results at best.  I shall pass over in silence French hypocrisy regarding foreign intervention.  The initial French air attacks apparently halted the Islamist rebels’ momentum, but not for long.  Within 24 hours the rebels had regrouped and recommenced their advance.  On the opposite end of the continent, in Somalia, a French commando raid to free a hostage-an intelligence operative who had been half for several years-turned out badly, resulting in the death of the hostage and one French soldier, and the capture of another.  Today the Somali Islamists announced the death of the captive, but boasted they had obtained much information from him.  Draw your own conclusions.

In the UK, Cameron is walking a tightrope, threatening to renegotiate Britain’s relationship with the EU, but refusing to put Britain’s membership to a vote.  His position is infuriating the French (go figure) and threatens his position atop the government in the UK, as splitting the difference just serves to get both the Europhiles and the Europhobes furious at him.  And Obama has told Cameron to get his mind right, and get on with the EU program-or risk the special relationship with the US.

And Germany?  Germany is being strangely quiet.

In sum, I think Europe is living in a fool’s paradise.  The ECB has staved off the imminent crisis, but the fundamental economic weakness remains, especially in Greece and Spain.  Moreover, France is in a dicey situation-at best-and socialist nostrums can only make things worse. Military action-and in particular, a protracted military engagement in a place as wild and sprawling as Mali-can only stress the French polity.

Yields are down, and there is a sense that the crisis has passed.  But the ECB can only levitate things for so long, especially if France struggles-or worse.  Greece and Spain are in extremis. In my opinion, it is only a matter of time before the bond markets get a serious case of the yips again.   So enjoy the what-me-worry? moment while it lasts.  I don’t think it will last long.

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3 Comments »

  1. Good Doctor: Your Rx for what ails the EU & Britannia? Mine is BHO. He may succeed in making Europe financially attractive for investment. Remember. He has not yet been inaugurated. And when his policies are fully instituted, things across the American Pond may not look so dire. Where is the economic mattress until then?

    Comment by Vlad — January 14, 2013 @ 9:55 pm

  2. It doesn’t matter for Hollande if 75% tax rates cost the gov’t billions in revenue; the rates make him feel damn good about himself and allow him to conduct a Mali-style missile attack on ‘income equality’, ‘greed’ or some other unsolvable concept.

    Comment by Donnie Plunkett — January 15, 2013 @ 3:13 pm

  3. @Donnie . . . similar to Obama, no? When asked in 2008 whether it made sense to raise the capital gains tax rate even though it was likely to reduce revenue, he replied that didn’t matter: it was all about fairness. And he is the King of the Drones. Hollande probably has Jupiter Complex envy.

    Here’s the exact quote:

    OBAMA: Well, Charlie, what I’ve said is that I would look at raising the capital gains tax for purposes of fairness.
    We saw an article today which showed that the top 50 hedge fund managers made $29 billion last year — $29 billion for 50 individuals. And part of what has happened is that those who are able to work the stock market and amass huge fortunes on capital gains are paying a lower tax rate than their secretaries. That’s not fair.

    The whole exchange has to be read or or seen to be believed.

    The ProfessorComment by The Professor — January 15, 2013 @ 4:15 pm

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