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Incompetent politicians is not going to solve Europe's debt crisis

David McEwen

Tuesday 15th November 2011

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Sacking a couple of incompetent politicians is not going to solve Europe's debt crisis and it could well take decades to sort the problems out.

One possible solution, using the European Central Bank's trillions of euros in reserves to help out ailing members, is not on the table because of deep fears about stimulating inflation.

Germany in particular, having experienced hyperinflation in the 1930s, is particularly paranoid about it. However, there has been no sign of widespread inflation in countries where there has been a lot of fiscal stimulus.

One exception is food prices, which seem to be escalating.

In the US, it has just been calculated that an average family Thanksgiving this year will be 13% higher than in 2010. In India, food prices are up 12.2% over the past year on average. In the UK, latest figures show food and drink prices rising at an annual rate of 5.8% and a forecast of 7.5% has been made for continental Europe.

In New Zealand, the figure is a more moderate 6.2% for the year to September.

Since the price of food affects everyone, but the poor more so, expect further social unrest if this trend continues.

Despite this, the global economy looks like it will avoid a double dip despite Europe's issues, latest statistics suggest.

Recent good news includes a decline in the US unemployment rate to 9%, the lowest since April, evidence that Chinese manufacturing continued to expand in October and, in Japan, the economy grew in the third quarter, the first time that has happened in a year.

One announcement in particular this week struck me as significant. This was a statement by China's premier at the recent Apec summit in Hawaii that China wanted to increase its imports. It flagged this as a heartfelt desire to help the rest of the world but in reality China's leaders are keen to develop an economy that can drive itself based on internal activity, rather than just being a source of cheap goods for the west.

Fortunately, what benefits China will also benefit the rest of the world and this, plus the recent figures, are vindicating the mildly positive upturn in equity markets of the past week or two. Barring further shocks, there is a good chance markets will stabilise at least.

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