Elections in Greece and France a couple weekends ago caused financial markets to gasp for air for a few days, with fears of unknown policies the new administrations might implement. In general, voters in these countries used the "throw the bums out" method, replacing officials who were using austerity measures of cutting spending and raising taxes to try to solve severe deficit imbalances and control the growth of national debts.
Austerity measures make a lot of sense on the surface. Stop spending money you don't have and tax those who can pay more to close the budget gap. The problem is that when an economy is struggling to avoid recession or to crawl back into a pattern of growth, spending cuts and higher taxes work against the goal of accelerating growth and job creation.
Greece is a mess and may well have to leave the Euro currency block of countries. Fortunately, the economy of Greece is tiny in the big picture of the world economy, and a complete default or collapse of the Greek economy would not derail the economies of the U.S. or of those higher growth regions like Latin America or Asia. Of course, we do need to be concerned about a contagion of the Greek situation to other larger countries like Italy and Spain.
In France, the conservative Nicolas Sarkozy was thrown out and an avowed socialist, Francois Hollande voted in. At first, we might expect some concern over a socialist oriented president in the world's fifth largest economy, but France has been there before. I suspect the markets are using this as a good excuse for a correction which was likely to occur anyway after a great start to 2012
A closer review reveals that France's president elect, who definitely has socialist leanings, ran on a campaign of trying to solve France's fiscal and debt problems by promoting growth. Instead of cutting spending and employing other policies, which will retard growth, he will likely try to implement techniques to promote growth, which will increase revenue and may be a better way of starting to solve the problems facing not only France, but most other European countries which make up the Eurozone.
Since no quick resolution is possible using either the liberal or conservative measures, perhaps kick-starting growth now and then using the revenue created by that growth, combined with some spending cuts after the economy is stronger makes sense. It follows closer to the model being employed here in the U.S. over the last three years. While we aren't out of the woods yet here in our own country, it is fair to say that we are currently the fastest growing developed economy in the world, definitely with a head start over Europe and Japan.
Of course, here and in other debt laden areas of the world, stopping the growth of national debts is a huge priority once we have built the critical mass of a lasting economic recovery. There will be no shortage of rhetoric here in the U.S. in the coming months as each side makes the case for its policies as we approach the important election in the fall.
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.