CNBC just held a discussion about the Irish situation which we think nicely illustrates one of the big problems haunting Europe and the markets.
In discussing the country’s aggressive austerity measures, investor Mike Holland opined something to the effect of: Well, couldn’t this be a good thing for Europe, as Ireland will set the example of what serious spending cutting looks like.
But this hits to exactly what we discussed earlier. Ireland already tried this once, and it failed.
And Greece is trying this, and it’s failing. And Spain and Portugal are trying this, and it’s failing.
The middle mind of investor logic is so wed to this idea that if you just cut spending, your budget problems go away, but that’s only true if you can keep tax revenue up, and there’s no guarantee of that happening.
It might be possible that you can cut the fat without cutting the protein — maybe — but to just assume you can come in, take a hatchet and restructure is naive, and it speaks to why a European breakup (or massive integration through a unified treasury) may be the only answer.
And the lesson applies to the US as well, especially to those who simply assume that a GOP congress, intent on keeping spending in check will necessarily translate into good things now.
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