Stock investors cheered news last week that the Europeans had finally cobbled together a plan to bail out Greece from its debt crisis and put a tourniquet on the other bleeding basket-case countries, namely Italy and then Spain.
They celebrated the deal as good for U.S. stocks and our economy because world markets are so intertwined and some U.S. banks hold European sovereign debt. The conventional wisdom was that the Europeans, like U.S. regulators in 2008, had stanched “systemic risk,” in which financial types lose money in one place and then pull away from doing business elsewhere, so lending virtually stops and the financial system shuts down. So traders bought, bought, bought -- making a big market rally.
But last week should have been more reason to sell than anything else. The “bailout” mindless stock traders celebrated may provide some short-term relief -- but that’s about it. Many smarter investors stayed out of the bogus market rally and are waiting to sell as early as today.
Fact is, nothing outlined in last week’s deal addresses the long-term problems facing Europe -- namely an unaffordable welfare state and the price that this free lunch imposes on the continent’s economy in stiflingly high taxes, regulations and a workforce that has grown so accustomed to retiring at 50 on government handouts.
Stock traders are a trigger-happy bunch. They buy and sell off the latest splashy headline -- as they did during the 2008 financial crisis, bidding up stocks on the U.S. bailout plan and then selling massively as the economy sank recession. Not until the Federal Reserve began printing money in March 2009 to ignite economic growth (and inflation) did the markets begin to recover.
Last week’s euro bailout certainly had that 2008 U.S.-bailout feel -- but only worse because of the half-baked nature of the plan.
For starters, banks have “agreed” to take a 50 percent loss on their Greek debt investments, thus preventing Greece from default and a wider economic catastrophe. With Greece out of the way, traders continued their buying spree on the prospects of a larger bailout of Italy, Spain and possibly France.
But Greece’s situation hardly seems fixed. The deal is said to be “voluntary,” even though a consortium of banks agreed to it. (The way it was sold to the media, any “cram down” of a haircut on Greece would have been seen in the market as a default, triggering a lot of bad stuff.) The deal also reduces Greek debt somewhat, but not enough to really matter -- the country’s debt level will fall from its current astronomical level to a slightly less than astronomical 120 percent of its GDP over the next 10 years.
But that’s without a fundamental restructuring of the Greek economy away from the welfare state to something that allows free markets to flourish so businesses can be the main employer rather than the government.
The same could be said for the rest of Europe. A stabilization fund is supposed to help recapitalize the banking system, especially those banks that hold the debt of Italy, Portugal and Spain. But guess what? If you think the Greek economy is pretty lousy, these countries aren’t far behind in economic decrepitude.
European leaders will also have to turn to China, which has been keeping the U.S. welfare state humming. That’s bad news for Europe.
Say what you want about the obstacles faced by the U.S. economy after President Obama’s various tax and regulatory schemes -- some semblance of the free market still operates here.
U.S. corporations are by and large healthy because they can operate in lower-cost parts of the world where the Obama economic scheme can’t touch them. Yes, the fact that they aren’t hiring here at home hurts the economy, but their general nimbleness and health help our GDP and enable our economy to grow.
Europe shouldn’t expect too much help from the Chinese, who know this and something else: Our culture is different, too.
Europeans love their welfare states, even as those initiative-sucking leviathans will lead to their eventual doom. In America, for every pot-smoking Wall Street protester who would rather riot than work, many more people are willing to work, innovate and create.
So Europe must restructure its society, no matter what bailout scheme emerged last week.
Charles Gasparino is a Fox Business Network senior correspondent.
Charles Gasparino joined FOX Business Network (FBN) in February 2010 as Senior Correspondent.