EU and UK: Raise Taxes and Cut Stimulus

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Europeans seem bent on acting like lemmings to the sea and jumping off an economic cliff. Not only are the eurozone and UK raising taxes and cutting spending, they want the rest of the world to follow their lead and will try to get this to happen at the next G-20 meeting in late June.

Why anyone would want to follow European countries on economic matters is a real puzzle. The EU's recent handling of the Greek debt crisis will be recorded by history as one of the major episodes of government ineptness of our time (and there is really stiff competition in that category).  Instead of dealing with the problem immediately and decisively by instituting dollarization and removing Greece from the currency union, EU leadership let the matter fester until it blew up. They then tackled the problem with an approximately one trillion-dollar bailout. The EU approach to economic problems seems to be: Why institute a simple cheap solution when an expensive difficult one is available? It's enough to make one ponder if EU policy meetings resemble a multi-lingual idiot's convention.

Over the weekend German Chancellor Angela Merkel stated that she was going to push for a swift exit from fiscal stimulus programs and a focus on debt reduction at the next G-20 meeting. It was German foot dragging on the Greek debt crisis that caused the euro to lose 20% of its value in six months. With a record of success like that, of course the rest of the world should be eager to copy Germany's economic policy ideas. Earlier in June, Merkel's cabinet unveiled substantial budget cuts and tax hikes. France did the same thing recently as have other eurozone countries. Merkel is also spearheading the drive for an international financial transaction tax with the money being used for future bailouts. The possibility that there shouldn't be government bailouts of financial institutions or that the financial institutions that might be bailed out should pay the tax themselves and not their customers seems to have eluded Merkel. Of course, financial centers like London and New York would shoulder a disproportionate amount of the burden, so it is the ultimate socialist solution - get the other guy to pay. Perhaps Merkel isn't as economically challenged as seems to be the case.

Conditions don't appear to be much better in the UK, although we won't find out until Tuesday, June 21st when an emergency budget will be announced by the Conservative-Liberal coalition government. The UK is part of the EU, but not part of the eurozone so it is not obliged to follow the 3% budget deficit to GDP limit imposed there (not that the eurozone countries themselves follow this rule). Like their fellow EU members, suddenly the Brits woke up and realized they had massive deficits (they should have been reading the papers, it's been reported there on a regular basis). Large spending cuts and tax increases are on the table. Even then, the UK's budget deficit could reach 10.5% of GDP in the 2010-11 fiscal year (still less the U.S. number for 2010). It is thought the VAT (value added tax) will be raised from 17.5% to 20.0%. There have been rumors that the capital gains tax rate will be raised from 18% to 40%. If this occurs, money will flow out of British markets at a prodigious rate.

If what's going on in Europe sounds familiar to Americans, it should. These were essentially the economic policies of the failed Carter administration in the late 1970s. During that era, the U.S. economy was chronically weak and the stock market went nowhere. This economic program instituted today could have far worse consequences. The global economy was severely damaged by the Credit Crisis and is still in a very fragile state. It is likely to go into a tailspin.  The predictable follow up will be a return to spending. This scenario happened during the Great Depression after Franklin Roosevelt tried to balance the budget after the 1936 election and the U.S. economy and stock market tanked. If elected officials today are determined to repeat the mistakes of the past, investors should take note and act accordingly.  
 
Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.