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A few weeks ago, the Wall Street Journal reported that a European court ruled that employees are not only entitled to long vacations- or at least long by American standards- but in the event they become ill while on vacation, they also get a "do-over."

In other words, employers need to guarantee five or six weeks of vacation, and if employees get ill while taking time off, they can simply retake the vacation when they're feeling better. While extending vacation time may be a good thing for an employee, it raises the costs for a company or for a government struggling to repay debt.

This relatively harmless ruling, easy to dismiss as silly, illustrates a broader European problem: Even when governments try to reform, restrictive labor laws and sympathetic courts can be an obstacle if they impede growth. Though Europe's politicians have made a reasonable, albeit slow, start to reform, Europe's existing labor laws and courts are unlikely to help today's austerity plans and efforts to end the eurozone crisis if they impede a pickup in Europe's secular growth rate. Thanks to the courts and laws, even when politicians want to reform, they often can't.

Recently, there was a similar (but arguably more serious) example in Portugal. As the Wall Street Journal reported over the weekend, a Portuguese court struck down a central element of that country's austerity program. As part of its efforts to comply with the terms of its bailout package, between 2012 and 2014 the government had planned to eliminate the traditional summer and Christmas bonuses for public sector workers. While the ruling eliminating the pay cut will not impact the 2012 budget, it will force the government to adopt additional measures to reach its 2013 target of a deficit of no more than 3% of GDP.

Italy faces similar challenges in reforming its labor market, and, in the absence of necessary labor reforms, Italy is unlikely to increase its anemic growth rate. Unfortunately, what holds for Italy and Portugal is true for the broader Europe.

Europe is not alone in having courts that act as brakes on structural reform. The United States will arguably face similar challenges in coming years (the recent Supreme Court decision on healthcare could be considered the first salvo in this battle). However, the United States still enjoys the bond market's confidence, i.e. it still has time. The same cannot be said of Europe. Without structural reform, Europe is unlikely to solve its sovereign debt or banking problems, and bond investors are likely to continue to lose confidence.

Ultimately, I believe the path to reform will continue to be slow and uneven, especially considering that several structural issues remain unresolved. That said, I believe a worsening eurozone crisis can be avoided if European politicians aggressively address their region's problems.

In the meantime, I continue to advocate underweighting Italy and Spain, which look cheap for a reason. I do like some countries in more economically stable northern Europe and I especially like Germany, which has stronger economic fundamentals than its eurozone counterparts.

Investors can access the northern European countries I prefer through the iShares MSCI Germany Index Fund, (NYSEARCA: EWG), the iShares MSCI Netherlands Investable Market Index Fund (NYSEARCA: EWN), and the iShares MSCI Norway Capped Investable Market Index Fund (NYSEAMEX: ENOR).

Source: Bloomberg, The Wall Street Journal

Disclosure: The author is long EWG and EWN

Disclaimer: In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Securities focusing on a single country may be subject to higher volatility.

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Source: Are European Courts A Brake On Reform?