(C) Markets’ challenge – the EU budget deficits

A glimpse of the macroeconomic map of Europe reveals traditional governance mistakes, in particular – inefficient, leftish policy in the so coined by myself “Latin” Europe.

It is impressive, how the countries from this region bear significant current account deficits, inefficient labor force, which comes hand-in-hand with higher unemployment, relatively lower GDP per capita and chronically lower GDP growth. The same “Latin” EU and Eurozone members, finance their inefficient social, or even socialist policy with fiscal expansion, through budget deficit, compensated by government debt, at relatively higher yields.

The government purchases multiplier, at which such policies are probably targeted is higher than one, only in efficient economies, which create, instead of destroy value.

As it seems the fiscal expansion has not yielded benefits as of today, and would probably not ignite the EU engine soon and at meaningful speed. Furthermore the generated to date monetary and fiscal liquidity remains frozen, by regulatory fear and bad loans hike anticipation, in the veins of the banking system.

The equity markets are not expected to benefit on the above factors. On the other side, as long as, we enjoy trust in the EU economy, the government debt markets will continue pleasing the “Latin” Europe debt investors. The divergence in the yields between Northern and “Latin” Europe will be attractive for short-long and global macro hedge-funds betting against the Euro.