3 big reasons Europe isn't fixed yet

Investors are cheering the European Union's bold bailout plan, and rightly so. But the debt problems behind it will linger.

By unknownUser May 10, 2010 12:44PM

By Michael Brush

Investors cheered Europe's "shock and awe" proposal to fix the Greek debt problems this morning, and rightly so. Near term, at least, the risk that defaults on government debt will wound European banks has been reduced.

 

But Europe isn't really out of the Black Forest just yet -- as Europe's "shock and awe" plan still leaves plenty of ammo for the bears.

So despite today's rally, there's still a good chance that the European debt issues come back and nag the U.S. stock markets -- if bears manage to spread more fear by harping on any of the following three themes:

  •  First, the plan still has to be approved by national parliaments throughout Europe. "This is going to be particularly difficult in countries like the Netherlands, where right-wing populists disagree strongly with the principle of fiscal solidarity, and in Belgium, where decision-making is chronically slow," says Erik Jones, professor of European studies at the Johns Hopkins School of Advanced International Studies. In Germany, and elsewhere in Europe, the plan will likely face serious challenges in court
  • Second, the plan still hinges on reform in Greece that somehow reins in generous government spending, and improves tax collection. It's going to be tough to reverse decades of practice here -- especially when Greeks used to the good life so readily take to the streets and burn banks to protest any change.
  • Third, the whole Greek debt mess highlights the basic problem of the European Union as an economic system: There's no central authority that has any real say in "fiscal" matters of taxation and spending. That still hasn't changed.

Meanwhile, across the channel in the UK, a hung Parliament makes it less likely the government will be able to take the unpopular steps needed to cut spending and improve the national budget.

 

The disaster scenario in all this for investors? Europe's new bailout plan stalls and UK finances remain a mess. So "Europe falls into a double-dip recession, which depresses U.S. exports and profits," says Ed Yardeni, of Yardeni Research. "In other words, the dramatic rebound in stocks over the past year was just a rally in a major secular bear market."

 

Yardeni is still bullish. He believes improving employment trends in the U.S. confirm the recovery is for real, and the Fed is likely to keep interest rates near zero.

 

But don't be fooled by today's gains. The bears aren't finished yet.

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