A Better View of the European Debt Crisis
The European Union has been facing a persistent crisis over the enormous debts of its weakest members since 2009. Negotiations, bailouts and austerity packages have failed to restore the confidence that leads to fiscal growth. Despite the increasing barrage of media headlines this situation has been brewing for some time and should come as no surprise to investors. A strong euro over the prior decade and the ensuing low interest rates enticed Greece and other euro members to encourage consumer and government debt. Spain and Ireland even experienced real estate bubbles due to the rock-bottom interest rates. The bursting bubbles led to serious unemployment and an Irish banking crisis. Sound familiar?
Unfortunately the same lack of consensus “do just enough to avoid a collapse” mentality that the United States has struggled with in recent years created a jittery global market this summer. What we all need to remember is that despite the volatility of the current market, the foundation is strong. Both European and U.S. corporations have trillions of dollars in reserve cash. Governments will eventually resolve the most urgent problems as the consequences of disagreement and inaction become too costly. The usual emotional drivers of fear and greed behind the sharp market ups and downs will eventually abate until the next “crisis”.
Lawrence Summers, current Harvard professor, former Clinton Secretary of the Treasury and key economic decision-maker in the Obama administration, makes an interesting comparison between the political stalemate that plagued the Vietnam War and the situation Europe finds itself in today – “unable to reverse a course to which they had committed so much, but also unable to generate the political will to take forward steps that gave any realistic prospect of success”.
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