Understanding the Credit Crunch: 11/01/2011

European Credit Crisis Set To Change Political Map

By Grant de Graf

The historic landslide victory by Spain's conservative opposition party, at the election polls, is yet another sign that the credit crisis is changing the European political map. The electorate will not buy into austerity, as has been evident by the riots in Greece and demonstrations in Spain, Portugal and Italy. Running a balanced budget or keeping a deficit in check, may be a practical blueprint to running a healthy economy, but it is not a plan that will provide a quick-fix solution to an economy that is ailing. On the contrary, irrespective of the political ramifications, it will only serve to undermine efforts by a government to restore economic prosperity.

Additionally, the communities in Germany and France will never be satisfied with financing the lunch bars of Europe's poor, which only highlights the inadequacies of the European Union. This is the asset test for the feasibility of such a union: whether tax payers are prepared to pay for the less fortunate in another country that is part of the union. Ultimately, Portugal, Italy, Greece and Spain (PIGS) must exit the Euro for those economies to benefit from a fluctuating exchange rate, to resolve the incongruousness that prevails in those markets. Ireland may survive the cut, due to the strong economic ties that it has with Britain. In the end, a Euro with Germany and France making up 90% of its constituency could survive and provide somewhat of an argument for its sustainability, even though weaknesses to the model still exist.

Conservative Party Victorious in Spanish Election