Fisher Investments Editorial Staff
Media Hype/Myths, Deficits

More Countries, More Problems

By, 11/12/2009

Story Highlights:

  • There are many reasons to be bullish right now, but we're always vigilant for what potential risks could be lurking.
  • European worries over Greece's large deficit underscore some of the EU's structural issues. The EU survived 2008 intact, but may not be out of the woods yet.
  • It's a small risk, but one or two countries leaving the EU could have serious ramifications for the union and the euro.

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With stocks well up from their March lows and amid signs of global economic recovery, there are many reasons to be bullish right now. But the world is never without risk—and it's important to consider just what potential perils may be lurking. The recent tiff between Greece and the European Commission is a good place to start. European stability has global implications, and though the European Union as an official organization seems to have survived the recession, there's a small chance it's at risk.

Greece's deficit is forecasted to reach 12.7% of its GDP this year—the largest deficit in the EU, and far higher than the 3% of GDP deficit limit imposed by the EU on its member nations. But Greece isn't the only country struggling to meet that limit. France, Germany, and the UK are above the EU limit too, throwing the ever-present conflict between national and regional interests into sharp relief.

Some folks (Milton Friedman, for example) didn't think the EU would survive a major recession. EU countries set their own fiscal policies, but the European Central Bank sets monetary policy for all. For example, Germany might favor higher rates to protect against inflation, while Spain might want lower rates to boost its economy—this virtually guarantees someone's always chafing under the single rate. Further, countries can set fiscal policy only to a point. As we're seeing now, limits on debt and deficits may prove untenable in the aftermath of a big economic downturn. The commission's admitted as much and demonstrated flexibility by extending deadlines for some.

Thankfully, so far it seems Sir Milton was wrong on this issue. The EU has not only survived 2008 intact, but member nations recently strengthened EU bonds by ratifying the Lisbon Treaty—including the famously euroskeptic Czech Republic. But it's not quite out of the woods. Domestic deficit problems could worsen for some weaker members, like Greece. And one or two countries bailing on the Union due to domestic economic concerns could have serious ramifications for the EU, the euro, and the global economy. (And it's one reason the dollar won't fall out of favor as the dominant global currency for a long, long time.) Dissolution of the EU is indeed a very small risk, but a risk nonetheless and one worth monitoring.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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