Eurozone Weighs Down U.S. Stock Market

by John M. Curtis
(310) 204-8700

Copyright February 2, 2012
All Rights Reserved.                                         

              As January ends, the U.S. stock market shows signs of resuming last year’s sell-offs, leaving many investors losing ground, unable to stay ahead of short selling hedge and private equity funds.  When President Barack Obama touted his economic reform signed into law July 20, 2010 in the State of the Union speech January 24, some economists scratched their heads.  Obama’s financial reforms did little or nothing to correct the dangerous derivative-trading habits of America’s biggest financial institutions, currently placing depositors’ cash at risk.  Meeting in Brussels, Belgium, Eurozone finance minister agreed on a bailout fund but not on how to control the spending habits of member states.  Promises of unparalleled prosperity abounded when the European Union launched the common currency in 1999.  Twelve years late,r nearly all of the Eurozone’s 17 members face insolvency.

            German Chancellor Angela Merkel urged Greece to allow Brussel’s to manage its economy, making the necessary adjustments to fiscal and monetary policy.  As Greece tries to restructure a $200 billion euro debt, Merkel hopes to prevail on the Euozone to restrict the spending of its sovereign states.  Using Germany as the model, Merkel wants other Eurozone members to keep operating deficits no more that 3% of the nation’s Gross Domestic Product.  Signing onto the euro, Europe’s most prosperous economies, from Italy to Ireland, watched mounting public debt bury otherwise solvent governments.  “Until this deal is actually done, there are going to be concerns.  The longer it takes there is more suspicion that there is something wrong,” said Michael Yoshikami, chief investment strategist as YCMNet Advisors in Walnut, Creek, Calif., concerned about stocks selling off.

            Eurozone officials never really thought through how to deal with budget deficits and sovereign debt.  When a Eurozone member runs out of cash, they must borrow at high interest, dependent on international credit ratings.  Paying back high interest loans becomes a real problem for Eurozone members currently out of cash and needing to fund massive pension and social welfare obligations.  When signing onto the euro, Eurozone countries didn’t understand they’d be forfeiting their sovereignty, leaving them hopelessly dependent on the Frankfurt-based European Central Bank.  No matter how much brainstorming in Brussels, Merkel can’t figure out how to implement the “austerity” programs designed to retire sovereign debt without causing nationwide shortages and rioting.  Germany can’t figure out how to clone the Eurozone’s disparate economies and cultures.

            Watching U.S. markets sell off again, the Eurozone continues to hamper global economic development, especially how to manage Europe’s struggling economies.  Expecting Europe’s seniors or workers outside Germany to give up pensions or social welfare benefits expects too much.  No Eurozone member should be expected to sacrifice more than any other country.  As long as Germany and France enjoy prosperity, it must be shared with the rest of the Eurozone.  Creating a bailout fund provides some safety net to less prosperous Eurozone countries but doesn’t deal with disparities in GDP and manufacturing bases.  Raising taxes or imposing austerity measures does nothing to share the sacrifice equally around the Eurozone.  Instead of kicking the can down the road, the EU must come up with a common tax base, requiring more prosperous countries to share their national wealth        

            U.S. markets use the Eurozone crisis to sell off equities, creating today’s sideways stock market, triggering short selling by unregulated hedge and private equity funds.  As long as unrestricted short selling adds to profits of funds and brokerage houses, the market’s long-term growth is in doubt.  Without long-term stock market growth, publicly traded companies don’t have the cash to add permanently to payrolls.  No matter how global equity markets, whatever happens in the Eurozone becomes the latest excuse to trigger short sellers.  Europe’s sovereign debt problems can’t be solved by temporary bailout funds.  They must be part of an overall tax strategy where a common tax base raises all boats.  Because the Eurozone requires all participants to forfeit coinage rights, the EU must account for glaring differences in the manufacturing and exporting bases of member economies.

            Instead of blaming profit-taking on the Eurozone, U.S. stock markets need to consider more restrictions on short selling that currently leaves long-term investors holding the bag.  While there’s nothing wrong with profit taking, there’s something very wrong when unregulated hedge and private equity funds beting against and taking profits at the expense of long-term investors.  Everyone wants the Eurozone to fix its problems but U.S. markets need to stop making excuses and deal with systemic trading problems, including short selling by the nation’s biggest funds.  Europe’s problems can only be solved when the EU admits current flaws within the common currency.  Creating a common tax base like the United States goes along way in fixing long-term problems.  Shortsighted bailouts only postpone the day of reckoning when the EU mist take full responsibility for the Eurozone.

  John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.       

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