Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Chinese Tech Stocks CCP Paranoia and Best AI Tech Stocks ETF - 26th Oct 21
Food Prices & Farm Inputs Getting Hard to Stomach - 26th Oct 21
Has Zillow’s Collapse Signaled A Warning For The Capital Markets? - 26th Oct 21
Dave Antrobus Welcomes Caribou to Award-Winning Group Inc & Co - 26th Oct 21
Stock Market New Intermediate uptrend - 26th Oct 21
Investing in Crypto Currencies With Both Eyes WIDE OPEN! - 25th Oct 21
Is Bitcoin a Better Inflation Hedge Than Gold? - 25th Oct 21
S&P 500 Stirs the Gold Pot - 25th Oct 21
Stock Market Against Bond Market Odds - 25th Oct 21
Inflation Consequences for the Stock Market, FED Balance Sheet - 24th Oct 21
To Be or Not to Be: How the Evergrande Crisis Can Affect Gold Price - 24th Oct 21
During a Market Mania, "no prudent professional is perceived to add value" - 24th Oct 21
Stock Market S&P500 Rallies Above $4400 – May Attempt To Advance To $4750~$4800 - 24th Oct 21
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

How to Profit From Europe’s Stealth Economic Recovery

Economics / Euro-Zone Jun 25, 2010 - 05:06 AM GMT

By: Money_Morning

Economics

Best Financial Markets Analysis ArticleMartin Hutchinson writes: European countries - both inside and outside the Eurozone - are slashing their budget deficits.

Greece, Portugal and Spain - three of the so-called "PIGS" - have to do so, of course. But Germany - generally reckoned to be in excellent shape - is also cutting its deficit, as is France, which hasn't run a budget surplus in 40 years. Britain, too, with no need to protect the euro (it's not a Eurozone member) just introduced a budget that cut the deficit by $140 billion over four years.


U.S. President Barack Obama and other Keynesians warn that Europe may push its own economy - or even the global economy - back into recession.

But here's the surprising reality: Europe may gain from its fiscal pain - and its deficit-trimming actions offer the best hope for a lengthy recovery.

A Flawed Theory
The Keynesian theory of economic "stimulus" rests on the flawed fundamental belief that government spending can create wealth. The fact is that just the opposite is true.

In reality, the money the government spends has to come from somewhere. So any jobs "created" by government spending are matched by other jobs - possibly more of them - lost somewhere else in the economy. It's part-and-parcel of the so-called "crowding-out" effect.

If financing is plentiful and state budgets are in surplus - or only experiencing small deficits - a burst of "stimulus" may offset a recession. If budget deficits are already large, or financial conditions are tight, the government job-creation may be more than offset by job destruction in the private sector - generally the small-business private sector - that is then starved of funding.

The considerations aren't merely financial - there are also "confidence" concerns. The decline in value of subprime mortgages and other bubble-era assets accelerated sharply when confidence in those assets collapsed. Once that occurred, mortgage lending became much tighter and home mortgages might have become impossible to obtain for a period - had the government not intervened with guarantees.

Similarly, when confidence in Greece collapsed, that country's cost of borrowing escalated rapidly. It wasn't long before Greece was no longer able to tap the capital markets, forcing it to obtain a bailout from its rich friends in the European Union (EU).

If that can happen to Greece, it can happen to anyone elsewhere. Very large budget deficits disproportionately increase the chance of a collapse in confidence in the country concerned. It becomes impossible to raise money for viable private sector projects. The Keynesian "multiplier" theory - which holds that unemployment itself reduces consumption and investment - shifts sharply into reverse.

The ultimate impact: Once a deficit gets beyond a sustainable point, its long-term costs far outweigh any potential benefit that the "stimulus" was supposed to create.

The Outlook for Key Markets
So where does that leave us with Europe? Well, in this seemingly paradoxical reality, as European governments rein in their budget deficits, they may actually increase the strength of their economies.

For those countries with large debts or deficits - such as Spain, Portugal, Italy and Ireland - the deficit reductions are necessary in any case to restore confidence in the economy and reopen the flow of funding to the private sector. With Greece - admittedly the most extreme case - this may not be possible: The combination of a feeble economy and a corrupt, kleptocratic government may simply make the place unattractive for many years to come.

For Germany, the reduction in borrowing is less necessary, but the weakness of the euro should prove hugely beneficial for Germany's major exporters. Thus even if the transfer of resources from Germany's relatively efficient public sector to its private sector does not boost output directly, the surge in Germany's exports should further strengthen that already-strong economy.

The two intermediate cases are Britain and France, where the combination of debt and deficits is alarming, but not immediately threatening. In both countries, the main problem has been the inexorable growth of the public spending - to 52% of gross domestic product (GDP) in Britain and 56% of GDP in France.

In Britain, the massive cuts in public spending now announced should revivify the economy, although the overhang of excess capacity in financial services remains worrisome.

In France, moves to raise the state-sector-retirement age to 60 - still nowhere near enough for long-term fiscal balance - can only help output by removing a little of the drain on the private sector.

Profit Moves to Make Now
For U.S.-based investors like us, the course is clear. Quite apart from our investments in the growth economies of Asia and emerging markets, we should look more closely at Europe - for at least the following three reasons:

•Europe's oversized state sectors are being trimmed.
•The region's growth may now accelerate somewhat.
•And - in contrast to the United States - Europe is reversing the mistaken "stimulus" policies of recent years.
Germany, in particular, is attractive, and no portfolio should be without some German shares, or possibly the MSCI Germany ETF (NYSE: EWG). For overall exposure to the countries using the euro, there is the iShares MSCI EMU Fund (NYSE: EZU).

Source : http://moneymorning.com/2010/06/25/europe/

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in