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The political economy of the euro crisis, part 2

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I have a slew of European articles for the links that I will use here instead to tie together the overarching themes dominating the European landscape. The dominant theme is that the economy of Europe is in tatters and this is causing a re-think of the policy course. In my view, the political space for the re-think is limited and will ultimately entail some tacked-on growth policies and relaxed deficit target timetables. However, the prevailing economic paradigm will remain the same, fiscal consolidation to prevent sovereign default.

As fiscal consolidation is a deflationary policy, I expect European growth to be weak. On the bank and sovereign debt front, some leeway is available but crisis is never far away. However, fiscal consolidation is negative for periphery corporate bonds in particular as I will detail below. 

Note, I have separate articles prepared for Spain and Cyprus, this one will focus on the European-wide policy level as well as on Germany.

This piece picks up where the last three I have written on fiscal austerity leave off: nothing in Europe has changed because of the debunking of the public debt position taken by Reinhard-Rogoff. Ample evidence now exists to demonstrate this is so.

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The crisis in Europe is far from over. And I do not believe there has been any paradigm shift in policy response. We will continue down the path of bailouts in exchange for austerity that began three years ago with the first bailout for Greece. But now two factors have been added to the mix. Austerity will be leavened by actual stimulus to create jobs and capital investment, not just structural reform policy. Spain and Portugal both are presenting budgets with this in mind, measures which will cause their targets to be pushed back. I believe these policies will be approved at the EU level too, marking the only real break in the austerity paradigm.

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Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.