It looks like the bears have gotten loose again. Just when we thought it was safe to go back into the market, along come the Germans to shoot down any dreams of a comprehensive fix to the euro-area debt crisis. Angela Merkel has said that dreams of a solution as early as this weekend are likely to be disappointed, and in Greece Finance Ministry workers began a ten-day strike. Hey, if the IRS doesn’t collect taxes, will people file?
The Germans are pressuring peripheral countries and private investors in order to increase the odds that their taxpayers will be paid back. It also doesn’t hurt that every time they threaten to pull their support from the rescue fund the Euro falls, making German industry more competitive.
Still, what the Germans want is budget discipline, and budget discipline is important. Cutting expenditures enough so that they fit within the revenues the government can reasonably collect is, well, reasonable. It can lead to a stronger financial sector, better allocation of capital, and improved consumer confidence. In the short-run, austerity hurts. Unemployment rises and consumers pull in their horns. But in the long run, living within your means means more sustainable living. It’s worked in Canada, Mexico, Sweden, and it looks like it’s working in Ireland.
The Germans will talk down their currency right until the crisis point. By then, the bears will be out. Let’s hope they don’t end up in a bear trap.
Douglas R. Tengdin, CFA
Chief Investment Officer
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