As the bond markets hammer the Eurozone, I'm stricken by just how much market power determines Government and central bank actions. The markets love the sugar-hit stimulus policies. But it seems the ECB's mandate for tight fiscal controls to head off inflation, forces its European members into austerity and/or default. This has an accelerated effect in degrading the health of each economy, in the immediate term.
Putting moral hazard aside, fiscal stimulus is not directly helping the economies for those its printed for. Hot money in our inter-connected international economic system, ends up inflating external markets. Asia, Commodities, treasuries. Pushing inflation into areas outside the economy that needs it most. But this has not, and will not stop the presses, as the effects of debt-deflation are winds blowing over all economies, and will hit China in the coming year.
The European tragedy takes the gaze away from US and Japan who have run the same deficits, and relies on the same bond markets to make up a budget shortfall each year. But its not a sustainable practice in the light of a world recession and an ageing middle class. Japan is ten years in advance through this lost generation, and their overall population is now in deep decline.
The sooner the weakest of European economies successfully pull off an Iceland, and reset their debt obligations, the quicker they can live within their economic means, and find some prosperity for at least themselves, and any competitive advantage they can carve out for themselves.
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