Halt ‘drastic’ spending cuts, says Carmignac’s Didier Saint-Georges

Didier Saint-Georges (pictured), member of Carmignac Gestion’s Investment Committee, says Italy, Spain and Greece should not be treated as severely as Greece, and the current austerity measures across Europe will lead to a lengthy recession.

“The ECB’s massive liquidity injections were effective in dealing with the threat of a European “Lehman event” and now the banking sector has most of its financing needs covered until 2014. That said, the famous LTROs are doing little to improve the European economic outlook.

“By tarring Italy, Spain and Ireland with the same brush as Greece (chronic profligacy in government spending) the European Commission and the IMF continue to force drastic austerity measures on these countries.

“And yet, before the onset of the crisis, the debt levels of southern European countries were trending down and did not exceed 75% of GDP on average. Spain and Ireland boasted budget surpluses while Italy had a significant primary budget surplus.

“What these countries need is greater competitiveness, more labour market flexibility and higher growth, not drastic spending cuts.

“At the same time, the banking sector is still being very overcautious (reserves deposited with the ECB as a safety net have increased by 50% in just one year), while the euro remains overvalued.

“So, while the ECB did manage to prevent the Eurozone’s sudden demise, the prospect of a lengthy recession looms large, and the self-destructive fiscal fast that this region, still in recovery, is inflicting upon itself is only making matters worse.

“Paradoxically, the countries enjoying a better growth outlook than Europe are the first to see their economic horizon brighten following the ECB initiative: the risk of a financial mishap in the Eurozone disrupting their positive trends has been averted.

“Barack Obama and Wen Jiabao, both in the final year of their terms of office, have Mario Draghi to thank”.

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