Euro states must live within their means

YOU and I earn €1,000 a month but we spend €1,200.

This has been going on now for a couple of years and the lender who provides the €200 we don’t earn is getting antsy. Aside from not covering our monthly outgoings we also have borrowings to buy train sets for you and shiny new sheds I built.

Our lender has asked us to try and raise a few extra bob or to reduce spending in an effort to balance the books. It is perplexed that these requests are met by howls of derision and abuse.

That reaction is accompanied by sycophantic so-called friends who tell us to give the two fingers to those who keep our excessive spending going.

We have neighbours up the road who are decent but a bit dry. They never came around for those all night parties we used to host. A number of times recently they came over for a coffee and gave us some advice.

Try to bring your spending down there, do something to get extra income, sell a train set or two. Last week one of them lost the head and roared “what part of repaying your debts don’t you understand?”

VAT increases, abandoning Metro North, cutting expenditure we cannot afford. Germany. Get it? Many moons ago my Mammy drilled in to me that savings were good and debt was bad.

Since then a career in financial services brought me face to face with elaborate and sophisticated financial instruments including asset backed securities, redeemable convertible bonds, dividend stripping and so on.

Each and every one of these can be boiled down to being either a debt or an asset. Controlling toxic debt and increasing assets is a simple but highly effective policy. The Germans do it consistently.

As you listen to the whinging and moaning around Europe about the need to balance income and spending, think about the German who saves like hell and hates debt. While the world is screaming at Frau Merkel to open the money printing presses, she sticks to a simple mantra — stop spending more than you earn and start treating debt like you would radioactive fallout. It must be eliminated and avoided as often as possible.

None of this is easy. It is, frankly, a painful process for societies and economies to kick the debt habit. It is far easier to hit the money presses and hand over cash that gives political leaders around Europe a free pass that they can use to stay in power. Then, the whole debt caper cycle would start again, as those politicians know they can always rely on good old Germany to provide a dig out.

This is why bond yields are jumping in those economies where spending is out of whack. Germany is holding their feet to the fire. Can you blame them?

* Joe Gill is director of research with Bloxham Stockbrokers