Greece has made some progress but needs to do more. Action is needed, not words.
Dynamics in Italy are worsening. Mario Monti is attempting to appease Germany, which may result in his ouster by the Italian electorate.
As we predicted, Spain’s aggressive property boom is now being followed by a banking bust. We think the capital shortfall numbers are much higher than expected.
New president Francois Hollande feels empowered to move in a different direction than Sarkozy—away from fiscal conservativism—with proposals such as rolling back the pension age and raising taxes. These socialist policies are likely to be unproductive over the medium term.
Contagion could spread to France, which has over-extended banks and high government deficits. In fact, France meets the criteria for serious problems far more than Italy does:
- Outstanding government debt is about 90% of GDP
- Budget deficit is 7%-8%
- Government constitutes 56% of GDP
Germany likely will wait to see if austerity processes work before changing its position. Support for a European Redemption Fund and banking reform is likely to come only when sovereignty has been ceded. They don’t see sufficient reason to act yet, with the euro at 1.25 against the U.S. dollar and the markets only 10%-15% off their highs. However, if France were to become a PIIGS nation, that might be the catalyst that forces Germany to change its stance. Until then, it seems the euro zone is still taking baby steps toward a United States of Europe.
Read Neil Dwane’s full article>>