Europe Fights Debt Fire with Garden Hose

To extinguish Europe’s problem of too much government debt, Eurozone leaders did something they’ve done before; they increased borrowing limits. Unfortunately for them, they’re still fighting a four-alarm fire with a garden hose.

After meeting in Copenhagen, Eurozone finance ministers agreed to a delightful debt ceiling increase of 500 billion euros. The rosy press releases announcing the news couldn’t hit the wires fast enough.

Although 500 billion euros is a large sum, it’s hardly large enough to deal with future emergency aid to Italy or Spain. Both countries have combined borrowing needs of 800 billion euros over the next three years, according to research from JPMorgan (NYSE:JPM).

In another interesting twist, iShares Germany Fund (NYSE:EWG) has shown growing reluctance to increase Europe’s ever increasing bailout limits. Could this be the early stages of an eventual separation from the currency bloc?

So far in 2012, the equity market in Europe has largely ignored the crisis. Vanguard Europe (NYSE:VGK) ended Q1 ahead by just over 10% and posted their best quarterly performance since 2006.

The dislocations between Europe’s stock market and real economy are growing wider and investors are throwing caution to the wind. It reminds me of a song “One of these things is not like the other” that I watched on Sesame Street when I was a kid in the late 1970s. Years later, the song served me well because identifying Europe’s incongruent distortions, by focusing on reality versus political propaganda, is a cinch.

Despite rising stocks, iShares Spain (NYSE:EWP) exemplifies how the region’s crisis is spreading.

Spain’s national unemployment rate is on target to exceed 25% this year, which puts it on par with Global X Greece’s (NYSE:GREK) unemployment rate. Home prices continue to fall and in major cities like Barcelona, Madrid, and Valencia home values have declined 26.86% since 2007. The Spanish government plans to raise corporate taxes to cover its deficits, which is likely to damage the Spanish economy even further. Spain’s economy is projected to contract 1.7% this year, which is probably being too generous.

Even though iShares Italy (NYSE:EWI) borrowing costs have declined from 7% in November 2011 to around 5% currently, the country’s economy is still paralyzed by worker strikes, public protests, and political instability.  Italy’s prime minster, Mario Monti, has seen his approval ratings drop to 44% from 62% in early March.

Currency Shares Euro (NYSE:FXE) has calmly eked out a small yearly gain of 2.16% and all is well, until the unexpected day it isn’t. And it’s that unexpected day that savvy investors should be preparing for.

The ETF Profit Strategy Newsletter and its Weekly Picks outlines key trading levels for the euro and contains high probability set-ups for the being pointed in the right direction.

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