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Thursday, December 8, 2011

Fiscal Restraint and the Euro

Fiscal restraint and austerity measures are difficult to impose upon member nations with the credibility required for transparent and enforceable rules.  Enacting new policy relative to these rules, when left up to politicians, would have to be complex.  It is especially complex when national interests need to be balanced, and I underscore Britain. 

When Mr. Draghi appears to have closed the door to fiscal intervention as suddenly as it appeared he opened it, and the markets quickly concluded the ECB's intention is to focus on interbank cash flow instead of grand bailouts.  As the European economy sustains continued stagnant economic growth and probably some amount of recession, it would seem highly probably that government revenues will be reduced, thus exacerbating bond rates.  Should bond rates rise substantially for some countries (Italy and Spain come to mind), there will be a level where it becomes unfeasible to undertake debt refinancing.  This, in turn, is likely to increase pressure on the ECB to move aggressively into the bond markets.  The numbers, thus far, seem to be growing with rapidity.  Some 200 billion Euros of additional contribution to the IMF, plus a 500 billion European Stability Mechanism to supplement the 440 billion European Financial Stability Fund. 

The markets are jittery, but I remain optimistic for continued moderate growth in the Canadian economy in parallel with modest growth in the U.S. economy.  While I don't see North America enjoying a dramatic recovery, economic conditions are strengthening.  And even though there is still substantial risk of Euroean recession and the potential specter of Italian or Spanish bond rate difficulties that could serpve to blunt North American growth, it is my belief that Canada will remain one of the most secure, stable, and prosperous economies of the developed nations.  

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