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In a recent research note Andrew Garthwaite of Credit Suisse discussed the two things that concern him most about the enduring crisis in Europe:

  • At which points do countries reach the breaking point in terms of the amount of austerity they can endure? Greek GDP has already declined 14% from peak and the Greek parliament is set to vote on the new round of austerity measures at the end of November (where legislation would implement the firing of 30K civil servants).
  • What will happen if the peripheral European countries keep missing their deficit targets? In the first half of the year, the Spain budget deficit was closer to 9% of GDP than the 6% of GDP targeted for the whole year partly, owing to the overspending by the 17 autonomous regions.
This is dead on.  The big risk (and likelihood) in Europe is that the “resolution” they are about to unveil will simply be some sort of enlarged version of the current plan.  That ultimately won’t fix the root of the problem as I’ve explained on several occasions.  The main issue here is that continued austerity that accompanies these new plans is actually causing the deficits to deteriorate.  The two risks above have the potential to blow the lid off this whole thing in the coming months as EMU leaders continue to misdiagnose and resolve the root of this issue which is the currency crisis….
Source: Credit Suisse

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