The EU’s Steep Fiscal Slope

By reasserting his bad-boy leadership, Berlusconi caused Italy a stock selloff and higher debt financing costs, adding to the European Union’s downhill financial slide.  Investors in Greek bonds, even after a 3rd bailout, expect more haircuts and a decade of gloom.  The EU approved a $48 billion bailout of four Spanish banks, conditioned on aggressive layoffs and branch closures.  Another $80 billion is needed by the rest of Spain’s banking industry, and the EU will be summoned in 2013 to backstop Spanish refinancing of $300 billion in sovereign debt.

 

Moody’s downgraded the European Union’s financial assistance fund (ESM) to Aa1 from Aaa, the same downgrade it imposed on France’s creditworthiness.  France suffers from falling competitiveness, soaring debt and deficit spending (the government spends 57% of GDP), and codified labor inflexibilities that halt small business vigor, typically the engine for growth.

The UK is poised for 5 years of stagnation without the ability to reduce its debt.  Moody’s is also looking at a downgrade for UK debt.

 

The European Commission drafted proposals for closer economic, fiscal and banking ties, contingent on budget sanity and removal of inflexible labor regulations, but because compliance earns financial subsidies, the EU is unlikely to make progress until after the September 2013 German election, since most Germans oppose more donations to badly behaving EU countries.

Europe as a whole is in a recession and is expected to stay there for all of 2013.  It seems destined to accumulate more debt.

 

In contrast, the US, UK and Japan are working hard at inflating at least part-way out of their debt burden.  But because the EU members are insufficiently tied together financially and because Germany resists an inflationary cure, the EU will need to fix its recession the hard way – with highly elusive growth.  Perhaps that’s why Citi Bank sees the EU suffering prolonged weakness.

Unfortunately for America, the plight of the European Union has direct impact in the US through stagnation in the annual $268 billion of imports of US goods.

Alan Daley is a retired businessman living in Florida and following public policy issues from a consumer’s perspective.

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