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Author: saunafool Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1956666  
Subject: Re: Galactic irony Date: 11/16/2012 10:57 AM
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You left out Ireland.

In the end, there are two separate problems in the EU. The first is the Euro. The reason it is so difficult for Spain, Italy, Ireland, Portugal, and Greece to actually reduce spending is that every time they make a cut, the economy gets worse and interest rates on their bonds go up.

Making matters worse, the ECB still thinks their #1 job is to fight inflation because they think Europe will turn into the Weimar Republic if they were to institute ZIRP. So, the ECB central bank rate remains higher than the U.S., even though the economy is clearly weaker.

Contrast that to the U.S., U.K., or Japan who control their own currencies. When the economies weakened, they cut interest rates to zero and borrowing costs went very low. Obviously (especially in the case of Japan) there are problems beyond what low interest rates will solve.

However, the point is that in Spain and Italy where they are clearly experiencing deflation, interest rates are running at 5-7%, not 1-2% like the U.S.

So, Spain cuts government jobs and wages--actual spending on government. The unemployment rate goes up, triggering an increase in interest rates. Now, interest payments on the debt go up, revenues to the government shrink, and the deficit gets larger.

It's been going on for 4 years now. The new ECB bailout fund seems to have helped a bit, but the EU needs to seriously reform the Euro to increase liquidity in the weak economies or they will never escape the deflationary spiral.
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