Posted: 10 May 2012 02:14 PM PDT by Jim Swanson
"The fault, dear Brutus, is not in
our stars,
But in ourselves, that we are underlings."
-Julius Caesar by William Shakespeare
The recent elections in Europe have
created a new crisis of confidence in the world markets. Last year, fear of
contagion raged, as bank failures spread throughout eurozone. This year, we are
experiencing a different kind of contagion. Voter backlash has swept two
austerity-imposing governments from power and now threatens other eurozone
regimes that have tried to impose their harsh brand of fiscal authority in an
effort to appease European creditors.But in ourselves, that we are underlings."
-Julius Caesar by William Shakespeare
In France, the president has been
thrown out. In Greece, newly elected legislators from the left-of-center party
are demanding a reversal of what they are calling the "barbarous"
austerity measures agreed to by the former government.
With more elections on the way,
politicians are now taking a fresh look at the timing of budget cuts that are
being implemented with the eurozone in the midst of recession. They seem to
have concluded that growth and austerity are incompatible. But, is that really
the case, or is it rather a case of who or what is fueling the growth that will
enable a country's economy to be lean at the same time that it is prosperous?
Deficit spending by the central and
peripheral governments of Europe and here in the United States has led to
mountains of debt that are out of proportion to the size and growth of the
underlying economies. European electorates seem to be telling their governments
that they are going to have to find another way out of the budget mess. But
what is that other way? No one seems to know.
Too much debt in Europe and the United
States is a significant problem, but in Europe, the debt crisis is a symptom,
not the cause, of its woes. It is clear from our data that labor costs in
Europe are too elevated to allow European production to be competitive; this is
especially true in the peripheral countries.
Falling market share in exports and
expensive and rigid labor pools are hallmarks of these countries. The promises
leaders have made to their voters to gain power have been geared toward making
life comfortable now, but not toward making economies competitive.
As a result, the government grows, the
private sector does not, and the key symptom of distress, the debt burden,
expands relentlessly.
Let's look at France. French voters
embraced the bold and exciting ideas of the country's new president, François
Hollande. Hollande, a socialist, is in favor of lowering the retirement age,
not raising it, as was championed by his center-right predecessor Nicolas
Sarkozy. Hollande favors 35-hour work weeks and wants greater protection for labor.
But even if Hollande can deliver on this promise, shorter work weeks and more
protections for labor are hardly a good prescription for this second-largest
economy in Europe. In fact it's this uncompetitive work force that has caused
the drop in French exports.
Government spending accounts for about
55% of the French economy. In the United States, where the government makes up
25% of the economy, there has been bitter debate about the government and its
role in the economy. What is going to happen to France's percentage if Hollande
gets his way? Hollande and his supporters may be correct in concluding that now
is not the time to cut back, but it seems to me cutting back is not in his
plans at all. So, in effect, Hollande, with his election promises, may not only
be ignoring the symptoms but actually worsening the spread of the disease. This
may be true of Greece and Spain as well.
The United States has debt problems
too. But unlike labor costs in these European countries, US labor costs are low
and the business cycle is flourishing. What's the secret? What do the Americans
know that the Europeans don't?
Well, Americans have not really
discovered anything new. Rather, it is the classic debate between Keynesian and
Chicago School economists. It seems that the flexibility and resilience of the
US labor markets have some key economic advantages. So, Hollande may actually
be taking France further away from prosperity by strengthening the country's
labor laws. The real path to growth and balanced budgets lies in allowing the
market, and not the government, to bolster the economy.
No
investment strategy, including asset allocation or diversification, can
guarantee a profit or protect against a loss. No forecasts can be guaranteed.
The views expressed are those of James
Swanson and are subject to change at any time. These views are for
informational purposes only and should not be relied upon as a recommendation
or solicitation or as investment advice from the Advisor.
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