Late last week the markets responding positively to news that Europe had made a decision to solve it's current economic mess. Yes, they made a DECISION to solve them not to SOLVE them. But in these troubled times I suppose a decision to do something makes everyone feel better. I posted last week about how we seem to be driven by emotions now instead of actual thinking, so we get market upsides when we feel better. Hard to invest and trade in such scenarios, but this is what passes for markets these days.
Let's dig into the DECISION and see what really happened. Here it is in a nutshell, the French President Sarkozy and German Prime Minister Merkel decided to change the European constitution to make all member countries abide by certain rules that force them on austerity plans. These austerity plans mean that each country's budget must meet certain restrictive criteria as to budget deficits and debt. This basically is a German plan that says you got to cut expenses and move towards paying off some of the excessive European debt. In return Germany will back you up when you want to sell bonds. France gave up some serious sovereignty to Germany for being able to say they helped shape the deal.
Now all of this supposed deal making has no teeth to make anyone do anything other than the threat of no bond backup, so when things get dicey and the people in these countries begin to feel the bite of less government spending you can expect member governments to begin avoiding the tough decisions. So all this could unravel beginning maybe next week. Again, as I said this was a DECISION to solve the problems not actually solve the problems.
The political angles here are good too. Consider that France has a election in about five months and Sarkozy wants to get reelected so that explains his decision to do whatever Angela Merkel wanted so as to APPEAR strong, when everyone knows French banks are in big trouble. Can he fake this long enough to get past elections? Germany has state parliament elections coming in 2012 and Angela Merkel needs to win these to hold onto her power too. Germany made clear in this agreement they were calling the shots as they want austerity and not money printing since Merkel knows that her voters want nothing to do with Germany using it's financial resources to bail out the rest of Europe.
The most interesting political angle here is that Ms. Merkel basically told President Obama to go to hell. Obama wants money printing in Europe and sent Treasury Secretary Geither to the continent last week to express his intense displeasure at the Merkel decision. Obama knows if Europe slips into recession his chances at reelection slip further as well. As I have said before Obama and Merkel do see eye to eye. Some of this comes from Obama being denied his speech at the Brandenburg Gate back on his pre-presidential trip in 2008. Obama holds a grudge and wants his piece of flesh and Ms. Merkel is having none of it. As the year goes on it will be interesting to see how this personal political angle plays out.
Europe has a massive debt, massive overspending problem from too much social programs and eventually this must be addressed. Taxes in Europe will soon approach 60% for many people, not just the rich, in some countries there and at that point taxes become harder to collect as people simply find ways to avoid them. Greece is a perfect example. Wonder why Obama wants us down this path as well?
Anyway in the end there is nothing new and nothing to hang your investment decisions on other than wait and hope some adults come forward and make the hard decisions. As of now no adults seems to be in sight. Why does not anyone in the US or Europe consider economic growth as a way out of this mess?
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