The cracks in the European Union are starting to widen.
Spain’s unemployment rate as of the end of 2011 is at a staggering 22.83%, while gross domestic product (GDP) is expected to fall by 1.7% in 2012 (source: ECB).
Amid these horrific statistics, the European Union is asking Spain why it didn’t meet the budget deficit targets set for it in 2011. Furthermore, the European Union wants Spain to implement measures to ensure they reach a budget deficit of 4.4% in 2012.
Spain has said that instead of the 4.4% budget deficit of GDP target demanded by the European Union, it will aim for a 5.8% budget deficit of GDP for 2012. With protests in the streets, attempting to cut the budget deficit to 4.4% of GDP would—in the Spanish government’s words—be political suicide.
The cuts would mean higher unemployment, which the country simply can’t tolerate.
As I have written previously, the austerity measures are causing so much pain in these southern European countries that it was only a matter of time before they started to fight back against the European Union.
If the European Union sticks to its new laws and finds Spain in violation of the austerity measures, it could fine the nation. Yes, desperate to find money, Spain could further be fined by the European Union itself.
It is not only Spain, but Ireland as well that must alter its constitution to meet the austerity measures. This alteration has automatically triggered a referendum, which will take place sometime in the next few months. If the people vote against the austerity measures, then where does that leave Ireland within the European Union?
The unemployment rate in Ireland is 14.2% as of February. Its GDP barely moved in 2011, with projections for 2012 in the 0.6% growth range (although with the European Union recession already taking hold, this will be a challenge).
If Ireland fights back, where does the country stand in terms of the European Union?
The crazy part is that, besides the austerity measures asked for by the European Union, there is another major problem that could surface by the end of April.
France’s election will take place at the end of April. Right now, in the polls, the socialist candidate has a strong lead. If he wins, he has stated clearly he is in direct opposition to the austerity measures. Besides the austerity measures, there are other socialist laws he wants to implement that would be against the general direction of the European Union and Germany.
Where does that leave France within the European Union? And one needs to ask the question, dear reader: where does that leave Germany within the European Union?
Germany could say that it tried, but will not bail out the rest of Europe simply so it can remain within the Union, especially if the other countries want to play by their own rules. Germany might decide it would be better if everyone fended for themselves with their own currencies.
There are major, major cracks appearing in the foundation of the European Union. If they are not addressed soon, the European Union could disintegrate. If it does, the financial tsunami that would hit stock markets worldwide would be devastating. Be careful with this stock market rally, dear reader.
Where the Market Stands; Where it’s Headed:
Yesterday, the S&P 500 experienced its biggest single decline since 2012. Could the bear market rally that started in March of 2009 finally be over? Not so quick, my dear reader. One day’s trading action does not establish a trend.
As I have been writing since the end of December, world economic growth is slowing. This concern is only now hitting the media and investors. The issue is not whether the bear market rally will cave in, but when.
What He Said:
“As investors we need to take a serious look at our investment portfolios and ask, ‘How will my investments be affected by an American grown recession?’ You should take what precautionary steps you can right now to protect yourself from a recession in 2007. Maybe you need to cut your own spending or maybe you need to sell some stocks that will take a beating during a recession. You know what tidying up you need to do. Don’t procrastinate…get to it now. And please remember: Recessions can happen quickly, stock markets don’t go up during recessions, and the longer the boom before the recession, the longer the recession. Just based on my last point, we have plenty to worry about in 2007.” Michael Lombardi in PROFIT CONFIDENTIAL, November 13, 2006. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.