Tags: Europe | euro | bullish | reforms

Why I Am Bullish on Europe and the Euro

By David Skarica   |   Friday, 19 Oct 2012 08:05 AM

Right now it is easy to be bearish on Europe.

Everyone has bashed Europe. They say the European politicians are just kicking the can down the road, that they are not dealing with the real problems. I do not see this as the case. Europe’s problems are more in the past than they are in the structure of Europe or its future. European countries, especially the southern “Club Med” EU countries, have always had large socialistic bureaucratic economies. They have strict labor laws that make it much more difficult for labor forces to stay flexible or for employers to downsize and become more efficient.

The economic boom of the 1990s and the real estate bubble of the 2000s covered up a lot of these flaws. They allowed southern EU countries to raise revenue and covered up a bloated public sector and outdated economic laws. However, the financial crisis of 2008 blew these up. We could see that Italy’s debt was out of hand, Greece was a corrupt basket case that had lied to get into the euro and Spain was running purely on a real estate bubble, as was Portugal to a lesser extent.

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However, Europe is now taking its medicine. During the German reunification, there were similar problems. Despite being economically strong, West Germany had labor laws that were too stringent, while East Germany was a basket case. When West Germany had to basically bailout East Germany, they had to reform or become a “has been” on the global economic front. They modernized their economy and moved their economy toward a production efficiency model. Germany is now neck and neck with China as the largest exporter in the world. Its economy has held up even as the global economy has slowed.

Germany is now making other countries in the Europe Union make the reforms it had to make in the early 1990s (other northern EU countries had also made similar reforms). These reforms are tough. Austerity, cutting back, raising taxes to cut the budget shortfall, reducing the size of the public sector and modernizing laws. Every country that has ever done this — Germany, Sweden, and Canada — has always come out stronger (it is no coincidence that those countries that did this austerity in the 1990s handled the financial crisis of 2008 much better than most of the world did).

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This is why I am on the European bandwagon. Instead of being shortsighted and pushing through stimulus measures for a short-term blip in the economy, they are undergoing long-term structural reforms. I think this will begin to really pay off over the next few years, and I am much more comfortable with being in European equities and its currency than its American competition.

About the Author: David Skarica

David Skarica is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes the Gold Stock Adviser. Discover more by Clicking Here Now.

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