Joel Bowman

It is better to spend money like there’s no tomorrow than to spend tonight like there’s no money! – Irish toast.

So the Irish have their excuse for the lamentable state of their nation’s economic affairs. They can blame it on the drink. But what say the Greeks…and the Portuguese…the Spaniards…Britons…Italians and, indeed, all the other nations signatory to the boneheaded European single currency experiment? To what barroom philosophy do they attribute their disastrous finances? No doubt the politicians will come up with something – or someone – to blame other than themselves…

“It was the ouzo!” the Greeks will scream… “The Chianti!” the Italians will echo… “The sodden weather!” the Brits join in. We can hardly wait to hear the rest…

Yes, fellow Reckoner, the state of the European Union is not good. Of course, you wouldn’t guess that from looking at the stock markets there. The Stoxx Europe 600 Index rallied to a 17-month high overnight. Apparently, investors are delighted by the future economic prospects of the embattled continent. The cost of insuring against losses on European corporate bonds using credit-default swaps fell during the session too, signaling either that the worst may be over, or that the crowd has it all wrong. We’ll side with the latter, history-tested assumption.

Even the Hellenes got a bit of reprieve overnight. BusinessWeek reports:

“Greek bonds rose after Standard & Poor’s said yesterday it isn’t reviewing the nation’s BBB+ rating for a downgrade as the government pushes ahead with efforts to narrow its budget deficit, the biggest in Europe. The yield on the two-year note dropped as much as 20 basis points to 4.52 percent.”

Well…if the ratings agencies aren’t downgrading it…it must be a buy!

The European Commission, however, does not appear to be so confident. The EU has asked France, Spain and Ireland for more details on their so called “austerity plans” and even suggested that several European countries were being too optimistic on their respective growth outlooks.

“The main risks to consolidation stem from somewhat optimistic macroeconomic assumptions and the lack of specification of consolidating measures,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in a statement before adding that deficits may be “worse than targeted.”

The commission also asked for “more details” from Belgium, the Netherlands, Austria and Germany, the latter widely held to be the best of a bad bunch. Could it be that the EU is acutely aware of the systemic weakness within its own ranks? Or is it simply covering its behind in advance, affecting to have “done something” before every last thread unravels? It’s hard to say.

One man who makes no bones about his opinion on the situation is Harvard University Professor Martin Feldstein. Two decades ago, Feldstein warned that the euro would wind up being an “economic liability” for the 16-nation bloc. Five years ago he observed that the rules governing the single currency generated a “very strong bias toward large chronic fiscal deficits.” And, in 2008, he predicted that the eurozone may even eventually splinter.

So, now that chronic fiscal deficits threaten to drag the entire single currency experiment asunder, and as Greece faces calls for expulsion, what does European Central Bank President Jean-Claude Trichet have to say about the possibility of a splintered union?

“Absurd.”

We’ll let the readers decide what constitutes “absurd.” We’re out of time in today’s leader to get into that debate…

Joel Bowman
Managing Editor, The Daily Reckoning

Joel Bowman

Joel Bowman is a contributor to The Daily Reckoning. After completing his degree in media communications and journalism in his home country of Australia, Joel moved to Baltimore to join the Agora Financial team. His keen interest in travel and macroeconomics first took him to New York where he regularly reported from Wall Street, and he now writes from and lives all over the world.

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