There is concern that Spain will drag the rest of Europe into recession. Don't worry. Here's why things will get sorted out.
This article published with permission from InvestmentU.com.
The Eurozone is back in the news again and — needless to say — it isn’t .
The problem is Spain. Unemployment is almost 24%. Among those under 25, it’s 50%. Last year, the budget deficit was 8.5% of GDP. Tax revenue is down sharply. And the IMF projects that this year’s deficit is going to be another stunner.
This is a much bigger problem than Greece … or Ireland … or Portugal. Why? Because Spain’s economy is more than twice as big as those three countries combined.
Germany and France want Spain to bite the bullet and follow austerity measures. But the Spanish government is acutely aware that its citizens don’t want austerity. They want growth. They want jobs.
There is concern that Spain will drag the rest of Europe into recession. Remember: Europe is about one-fifth of the world economy (roughly equal with the United States). The 27 members of the European Union are the world’s largest importer (excluding exports to each other).
So while politicians dither, the clock keeps ticking. And investors on both sides of the pond keep wringing their hands. They shouldn’t.
Yes, politicians throughout the West are famously spineless, afraid to act (and therefore offend some special interest group) and always ready to kick the can down the road, especially past the next election. But, ultimately, the financial markets will force them to do the right thing.
How can we be sure? Because it always happens, and it’s happening now.
Opinions and talk are worth about what you pay to hear them. But investment capital is precious. And it doesn’t stick around where it’s treated poorly.
Note that interest rates on Spanish government bonds have already pushed up to 6%. This is a warning shot across the bow. Spain well knows that it cannot afford to keep borrowing at 7% or higher. At that point, its deficit becomes immediately unsustainable.
The lesson all politicians learn
Ultimately, markets force politicians to make the tough decisions. At last they can tell their constituents the truth: “We simply have no other choice."
All politicians learn this in the end.
Bill Clinton’s most famous quote wasn’t “I smoked it, but I didn’t inhale” or “The era of big government is over” or “I did not have sexual relations with that woman, Miss Lewinsky” or even “It depends on what the meaning of the word ‘is’ is.”
As Bob Woodward reported in his book , Clinton was astounded to learn that he couldn’t just take whatever executive action he wanted or pass populist legislation to stimulate the economy. The markets would tell him what he could and couldn’t do.
Or as Clinton put it, “You mean to tell that the success of the economic program and my re-election hinges on a bunch of ****ing bond traders?”
Ah, daylight at last.
I’m not saying Europe isn’t a mess right now. It is. I would certainly stay away from European banks or Spanish bonds or euro-denominated debt of any kind right now. But in the end, financial markets will force Europe’s politicians to act responsibly.
And that’s a good thing.