The Games Europeans Play

Includes: EWQ, FXE, UDN, UUP
by: Katy Delay

From my vantage point above the Rhone River in France, I take pleasure in watching the games the French play as they deal with their current deficit and debt crises. What the French do may seem irrelevant to the American investor, but this is not the case.

Europe is in a deep crisis of identity. Its member states are deeply divided about the destiny of their more profligate brethren. France, usually thought of as one of the stronger northern countries along with Germany, is actually on the brink of disaster itself. The French and their banks are desperate for cash, not only to balance the budget, but to cover financial institutions that have bought up a lot of bad European debt.

What is important to note is that the current regime is not dealing with the fundamental problems. Instead, the newly elected administration has decided it's game time. Campaign promises must be fulfilled, even if the handouts are financed with money the government doesn't have.

Examples: One promised handout is the "Allocation de Rentrée Scolaire," a small gift to the parents of every school-age child in the average amount of 370 euros, to help cover back-to-school expenses.

Another is an increase in the minimum wage by 2 percent. This amounts to 21.50 euros/month net -- just enough, I suppose, to pay for the rise in the gasoline price (which, by the way, is not included in the French CPI, just like in the States). Oh, and by the way, gas costs 1.60 euros a liter here, or about $7.50 a gallon.

Which reminds me, the French Prime Minister announced yesterday that the government will be reducing taxes on gasoline (temporarily), and will be raising the amount of money savers can place in non-taxed bank accounts at 2.25% interest, previously limited to 15,300 euros per person, now moved up to 19,125 euros.

The little common sense remaining must have reminded lawmakers to tax back the cash needed to pay for these goodies, preferably from someone who can't complain, or someone who won't notice.

The first grab will come from the reinstatement of taxes on overtime pay, which the previous president had eliminated in an effort to liberate uncompetitive French businesses from the heavy weight of social charges. With this reversal, the very same people who receive the 21.50/month increase in minimum wage will be taxed at least this amount if they do a little overtime. I suppose the government hopes they won't notice.

Then there's the new 75 percent tax on the "rich," a "one-time" confiscation, it is said. (Right, I believe that.) This only applies to those people earning more than 1 million euros a year. For both the middle-class masses and for the "rich" who are the victims, this is a very visible tax. But that is this point, isn't it? It creates an arena where the common people can enjoy watching the "rich" squirm, even if the tax itself doesn't solve any real problems.

And soon there'll be the financial transactions tax on stock purchases, what Le Figaro calls a tax on the "wise family man." A lot of the French think that only those nasty, filthy-wealthy stock-exchange traders will feel this one. (In all fairness, this tax was promoted by the current regime's predecessor as well.)

And get this: With his best game face on, the President announced his choice to travel by train rather than by jet whenever possible. Cameras were present at his first outing. Unfortunately, he missed the last train home and had to be driven all the way after midnight, but at least he said he got a lot of work done. (Everyone seems to be ignoring the extra security risks.)

And finally, the President has lowered his own salary and those of his ministers by 30 percent . This is a very visible gesture. Unfortunately, at the same time he increased the number of ministers to 38 from a previous 25 or so, i.e. some 50 percent (an invisible expense).

None of this addresses the upcoming crisis in France, which will have repercussions throughout Europe, and which will ricochet across the Atlantic. The French are counting on one thing: European Central Bank (ECB) monetary inflating.

This seemingly painless political tactic has stolen trillions of dollars from everyone's purchasing power since the beginning of the 20th century, and the game continues to this day. It's no surprise that the current French president is in favor of ECB monetary easing to aid Greece out of its problems. After all, France may be next.

So the French politicians continue to play games, waiting for their savior ECB to start rolling the printing presses. And the ECB's presses are backed by the US Fed, through eurodollar loans.

What does this spell for the American investor? A need to protect investments from upcoming dollar and euro devaluation, through maintenance of any holdings in gold-related products and certain foreign currencies that will hold up in comparison.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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