Europe is leading the world higher today on two items:
1) EU President Barroso stating that there are limits to austerity.
2) Spain’s Prime Minister Rajoy agreeing with Angela Merkel that nations must cede sovereignty if Europe is to last.
The first of these issues is just political grandstanding. Europe’s problems are not related to whether or not EU politicians pursue austerity or growth policies; they are related to EU bank solvency and demographics.
Europe, at its core, is a 17+ country union in which aging populations, all promised large social and welfare payments at retirement, are lining up to cash their checks at the very moment in which a massive real estate bubble collapses and threatens to take down their banking systems.
Having run up tabs that it cannot possibly hope to meet (both on a personal and a national level) Europe is now playing around with ideas like growth and austerity as though EU politicians can simply pull various levers on a macro levels and the EU economy will start roaring again.
The fact of the matter is that the only way Europe could resolve its issues would be if it started running real surpluses and seeing massive GDP growth of 3+ per year for at least five years.
That would be growth. But the chances of Europe doing that are less than 1%.
As for #2, Rajoy isn’t saying anything new or meaningful. Ceding sovereignty won’t solve Europe’s problems. Germany doesn’t have the funds to hold the union together (even if it wanted to).
Germany is already sporting a Debt to GDP of 81%. When you include unfunded liabilities its over 200%. The country’s export driven economy is at risk due to a global economic slowdown. And if things should get ugly globally, Germany will be in no position to hold Europe together.
All in all, the markets are falling for the same ploy they’ve fallen for dozens of times in the last few months: more political promises from those who cannot and will not do what is needed to solve the region’s problems.
How long this latest pop lasts remains to be seen. But the clear signals are already in place that the global economy is slowing once again. And now amount of political posturing will solve that.
I’ve been warning subscribers of my Private Wealth Advisory that we were heading for a dark period in the markets. I’ve outlined precisely how this will play out as well as which investments will profit from another bout of Deflation.
As I write this, all of them are SOARING.
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