Is Non-Existent Austerity Priced in to Euro Stoxx?

Deficit spending in the euro zone has also been rising some, and after the latest rounds of austerity and subsequent deficit increasing weakness may total something close to 7% of GDP.

That should be enough to muddle through as well. Austerity hikes unemployment and deficits to the point where the resulting deficit is sufficient to sustain things. Without another round of austerity there should be some sort of stability of output and employment.

That is, while it’s doubtful the ‘new europe’ will engage in meaningful fiscal expansion, it may not proactively raise taxes and/or cut spending in any meaningful way, either.

Read it at The Center of the Universe
macro update
By Warren Mosler

A Euro zone deficit approaching 7% may not be enough stimulus to induce growth but it doesn’t ring of much austerity either. I agree with Warren that most of the promises for further cuts or tax hikes will likely not be implemented in the near future (politicians are recognizing their political careers don’t succeed for long with those plans).

In The Forthcoming Profit Recession, I looked at Kalecki’s Profit Equation and how “government deficits have been the primary driver during this recovery.” Given the comparable size of US and European deficits, it stands to reason that European corporate profit margins will continue to be supported by large deficits too. Although the economic picture in the US remains better than Europe, it’s not clear the difference is as large as suggested by current stock markets (SPX = S&P 500; SX5E = Euro Stoxx 50):

(Source: Bloomberg)

Despite current deficits, if headline risk pushes the private sector to further retrench than Euro zone growth may turn negative. Headline risk itself may pressure Euro stock prices lower as well. However, as Warren notes:

Yes, there will be all kinds of credit related vol, but under it all there will be sales and profits taking place. The businesses that are still around are the survivors who know how to get by in this kind of economy, where, while slower than it ought to be, there is still about $40 trillion worth of goods and services getting bought/sold in the US and Europe. GDP growth has gone to near 0, but not GDP itself.

Companies will still earn profits and still pay dividends. As fear grows, great opportunities to invest in lasting companies will multiply. Wise investors should be currently trying to figure out which companies will survive and at what price the risk/reward becomes a definite buy.