The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.NEW YORK (TheStreet) -- Governments may soon fall in France and Holland, and are quickly losing legitimacy elsewhere in Europe, because austerity programs and a common currency risk throwing the continent into an endless recession. Europe's infamous labor laws, which make layoffs expensive and businesses reluctant to invest, have long impeded investment and productivity growth. During the expansion of the 2000s, the competitive core -- Germany, other northern economies and important parts of France -- coped better and accomplished stronger productivity. Consequently, the euro became undervalued for those economies and overvalued for Mediterranean economies -- specifically, goods made in the north became bargain priced and those made in Club Med states too expensive. 10 Stocks That Won't Leave You High and Dry >> Southern economies suffered large trade deficits with the north and insufficient demand for what they make. Governments in Italy, Greece and Portugal borrowed feverishly to keep folks employed, finance early retirements, and provide inexpensive health care.
Limited FlexibilityWhen the financial crisis came in 2008, central banks in Spain, Iceland and Ireland could not print money in the manner of the U.S. Federal Reserve to shore up bank balance sheets. Instead, their governments were forced to sell bonds to raise euros to bail out banks, and borrowing requirements were too large relative to the size of their economies. Investors fled and their national finances collapsed. The 2011 Fiscal Stability Pact, which requires all European Union governments to push down deficits to 3% of GDP before the continent as a whole has recovered from the Great Recession, makes the problems of accomplishing recovery in Italy, Greece, Ireland and other troubled economies impossible -- they have fewer customers for their exports, high unemployment and hence, can't earn the euros and grow their tax bases to pay off their debts. 4 Stocks That Are Real Sleepers in 2012 >> Exacerbating matters, the big European banks are burdened with huge amounts of private debt that will never be repaid. Since December, the European Central Bank has been aggressively lending to them, but with bank regulation remaining the province of national governments, it lacks the clout to force reforms the Federal Reserve enjoys when doling out aid. Hence, the European banks, rather than raising enough new capital and writing off failing loans, are employing questionable bookkeeping -- reminiscent of practices employed by U.S. banks before their collapse -- and are using ECB funds to paper over dodgy loans.
Changing the RulesTo get Europe back on its feet, the Germans and broader EU must first dial back a bit on deficit reduction while continuing labor market reforms. However, they will never get out of their long-term quagmire without abandoning the euro in favor of national currencies. This would permit exchange rate adjustments that would better align prices in weaker economies with those in Europe's strong core, and permit exports and debt repayment by troubled economies. Also, the central banks of individual European countries, armed with their own currencies, would be able to tie aid to banks with genuine reforms -- increasing capital and restoring credible lending practices.
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