Related NewsCourt rules FCC crackdown on broadcaster on air curse words is unconstitutional Developments in European capitals don't interest me much as far as investing goes. But a raging debate on government spending to prop up struggling economies could have a big impact on our stock markets.
Plans by the Greek government to significantly cut spending prompted violent protests last month.
The Obama administration is coming down on the side of more economic stimulus spending. With a 9.5% unemployment rate and weak housing market, officials believe we need to spend to keep our fragile recovery intact.
The leaders of the Eurozone, where unemployment is 10.1%, are voting for austerity, slashing expenditures and trying to reduce deficits. This may be because Northern European countries have lower unemployment rates and want to ensure that others, like Greece, Portugal, Spain and Ireland, where unemployment is as much as 20%, make needed sacrifices. Or it may be that countries like Germany, where people have lived with runaway inflation, regard soaring prices as a greater threat than spending cutbacks.
This is a marked change from the financial crisis, when major countries worked together, providing stimulus funding and bailing out troubled financial institutions. As I see the big picture, the global economy would have been far worse if they had not. But our allies are no longer following our lead, and there is a big split between advocates for more spending and those arguing for cuts.
Countries that spend more are likely to have lower unemployment and faster growth. This would be bullish for stocks of companies that will see sales increases. In this country, that's likely to mean homebuilders, retailers, financial services companies and alternative energy companies, among others. On the other hand, the spending will also lead to higher debt and inflation, which will be bad for bond investments, people living on fixed incomes and future generations, who'll have to repay the debt. It could also lead to downward pressure on the dollar, which could add to inflation.
Countries that cut spending are likely to have higher unemployment and slower growth rates. Corporate profits could go down. However, interest rates will remain low, helping bonds and people living on fixed incomes.
If we continue our economic stimulus spending plan but Europe does not, money could flow away from the U.S. This could put pressure on our currency and make it more difficult for us to finance our deficit.
PHTO BY Kolesidis/Reuters
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