Yesterday, Italy joined other EU countries and announced $30 billion in austerity measures. As an aside, Italy's deficit as a % of GDP is approximately half that of the US. All the while another stimulus package is being discussed over here. The Europeans are dealing with the root of the problem and cutting out of control spending instead of kicking the can down the road.
There are many critics who say that the Europeans are clueless and now is not the right time to cut spending. The problem is that it is never the right time and that is the reason we are where we are. Alan Greenspan and Ben Bernanke have tried to avoid recessions at any cost. It is only getting harder to make the cuts that will eventually be needed. Had they allowed recessions to naturally occur instead of fighting it tooth and nail imbalances would have never reached the current state.
These critics of cutting deficits seem smart because the market agrees with them. Whenever there is a bailout or a spending bill the market rallies. But the market liked the Long Term Capital bailout, The Internet Bubble and The Housing Bubble. Maybe its time we stop looking to markets for advice and use common sense. The answer to debt problems is not more debt and the answer to deficits is not more deficits. Acting responsibly will hurt and markets will likely go down but at least a foundation for a real recovery will be built.