The sovereign debt crisis in Europe will create wild gyrations in the stock market for years to
come. Germany is in control of the Euros future and of the fate of the European Union.
Germany must decide whether to hold these profligate countries accountable for their sins of excess or forgive some of the debt in exchange for greater short run stability and growth. If they choose the former, they risk a splintering of the Euro and European Union. If they choose the latter, they risk inflation and kicking the problems down the road.
Germany still remembers the Versailles Treaty and how the world crushed their economy by placing war reparations that the defeated state would never be able to repay. Ironically, Italy was one of the countries they owed money. The Germans were not let off the hook to pay off their debts when they needed the help of their neighbors, and now they are holding their neighbors to the same standard. Moreover, the war reparations debt led to the printing of money that led to hyperinflation. Therefore, there is less hope of the ECB printing money or forgiving debt due the Germans elephant like memory.
Due to these conclusions, in 2012 the U.S. equity market will have wild swings and most likely finish the year flat to lower. The Europeans will have a massive deleveraging exercise and thus liquidity will be lower as will growth. Europe will fall into a recession and that will also slow the Bric countries down possibly sending the world into a global recesssion.
Markets that will do well:
Dollar
U.S. bonds
Markets that will struggle:
Euro
U.S. stocks
Gold
Commodities
Tech stocks -Nasdaq
U.S. exporters
7 comments:
Germany has a very tough decision to make and I believe that there is not a right answer to fix the European Union economy. I think Germany's best bet is to forgive a little bit of the debt and try to control the inflation that may follow. I can see why Germany would not want to forgive any of the debt but for the benefit of the European Union economies it would be smarter to forgive some debt and try to address the problem head-on.
I think that Germany should hold the profligate countries accountable because that's what Germany had to do in the Versailles Treaty and just finished paying of those war reparations 92 years after the treaty.
Since Germany is in the position to control the future of the Euro, they are at a standstill at what to do. Due to burden placed on Germany from the Treaty of Versailles, they have no desire to forgive the debt. Although i think that it would be best if they forgive some of the debt in order to help maintain the Euro.
Although I can't speak on behalf of the German people despite what they may have gone through during the early twentieth century, I believe in this case, that two wrongs don't make a right, with an unstable economy, some leniency on Germany's part might just be what the EU needs
Germany could always hold off on collecting the debt for a few years as that would allow countries such as Spain and Greece to stabalize and grow (possibly). When their economies are stronger, Germany can then demand their money with reduced consequences.
The Versailles treaty keeps the German will to forgive the debt at very slim. Germany can just wait and hope the economy bounces back big so they get their money back,
Holding a grudge would not be a smart decision by Germany. Allowing countries within their currency to fail would not only hurt those, but Germany as well.
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