Europe… past and present.

Spanish bond yields continue to hover just under 7%, an unsustainable level.  European Central Bank President, Mario Draghi, ignited a stock market rally with his comments two weeks ago that the ECB would do “anything it takes” to save the Euro.  Last week the ECB met but did not take any new action to help stem the crisis and that is a major reason that Spanish bond yields have not had a significant drop.  My take is that after Draghi made his remarks the German Finance Minister reminded him that currently they are not willing to to do “anything it takes” to save the Euro as that would mean Germany standing behind the debt of countries like Greece, Spain and Italy. The German people are not in favor of writing a blank check to their Euro neighbors, nor is the German Finance Minister.

As a refresher, the German economy was in real trouble ten years ago and then Chancellor Gerhard Schroder began reforming the country by lowering taxes, reducing stifling regulations, reduced welfare programs and cut down on the level of government spending.  These reforms were not popular at the time and there were some difficult times immediately following implementation.  Chancellor Schroder stuck with the reforms and the German economy began to flourish.  I bring this up because today Spain, Italy and France, among others, have a choice.  The choice is whether or not to go in the direction that has worked so well for Germany or double down on the policies that have brought so much pain to the Eurozone, such as high taxes, excessive regulations, extremely high levels of government spending, etc.

In France, President Francois Hollande is proposing a 75% tax rate on the highest income earners.  This is not a recipe for increased economic growth.  Here are a few of the important points from a New York Times article addressing France’s economy:

– “French people have an uncomfortable relationship with money,” Mr. Grandil said. “Here, someone who is a self-made man, creating jobs and ending up as a millionaire, is viewed with suspicion. This is big cultural difference between France and the United States.”
– They also know of companies — start-ups and multinationals alike — that are delaying plans to invest in France or to move employees or new hires here.
– Taxes are high in France for a reason: they pay for one of Europe’s most generous social welfare systems and a large government. As Mr. Hollande has described it, the tax plan is about “justice,” and “sending out a signal, a message of social cohesion.”
– “The thing French politicians don’t seem to understand or care about is that when you tax away two-thirds of someone’s earnings to appeal to voters, productive people who can enrich businesses and the economy won’t come — or they will just leave,” said Diane Segalen, a corporate headhunter.

Good news as the U.S. housing market continues to improve. Checking back in with Bill McBride at Calculated Risk:
http://www.calculatedriskblog.com/2012/08/the-economic-impact-of-slight-increase.html