As investors have digested the implications of the bailout package of close to $1 trillion for the irresponsible spending by the countries in southern Europe, Morgan Stanley (NYSE:MS) and Credit Suisse (NYSE:CS) have rightly noted the strong risk of inflation that accompanies the rescue package.
Fears are coming from what appears to be an increasingly lax attitude by leading central bankers in Europe like Bank of England Governor Mervyn King and European Central Bank President Jean-Claude Trichet.
Although the European Central Bank says they’re not going to fund the bailout by printing more money, which would increase inflation, it is thought it is only a matter of time before they will do that, and if and when that happens, it’ll make things harder in year as far as consumers and probably businesses go.
Another problem with the bailout by the EU is it’s not really dealing with the underlying problems which brought this to a head in the first place, and that’s the entitlement culture created by socialist governments which isn’t sustainable.
while some measures are being taken to cut back on that by some of the countries, the offering of a bailout for these nations is just putting off what will have to be done, and that only extends the pain and problem which must be faced head-on to really be taken care of it.
The other concern about inflation in the EU is the enormous size of the bailout package, which seemingly out of nowhere increased from between $100 billion to $200 billion for Greece, to almost $1 trillion for all the countries in trouble.
This was obviously done in order to not prolong the story, as the daily coverage kept the failure of the EU in the minds of people around the world. That has been temporarily stopped by the size of the bailout money offered, but it’s questioned by many as to whether this is just the first of a number of offers to shore up the countries in the region, which of course would become a vicious cycle leading to even more inflation.
When will it all stop? No one knows. As a number of people have said, Greece should have been allowed to default in order to send a strong message to all the countries in the EU that they were serious about the euro and being financially responsible.
Bailing out these countries has sent the opposite message, and now they know, like the giant banks in the world, they can get away with irresponsible financial practices and the governments and central banks in the world will rescue them.
There is only so far that can go, and it seems we’re stretching out to the outer limits. Once the welfare, entitlement culture has no more money to take from others, they’ll be forced to take significant austerity moves that the market can support.
That day is close upon us, and it’s unfortunate the politicians and central bankers refuse to cut off the spending addiction they in fact helped create.
As far as inflation goes, it is upon the world, and printing money and offering bailouts will only exasperate the problem, not solve it.