Merkel managed squeezing the shorts late last week (and fixing the half year p/l for many).  Austerity and bank bail outs will apparently save the “problematic”  Eurozone countries. We have argued over the past weeks that the first “good” signs in Europe are seen, as the “elite” is at least acknowledging the problems. Our long Med countries vs short DAX recommendation a few weeks ago has performed well, but the EU phoria won’t last forever, and we expect the futures to start hitting some resistance levels shortly. 1400 is a big level in the SPX. Market reactions and the fundamental shape of the economy are two different things. Below are some lessons from the Latvian situation, by Sommers and Hudson.

Austerity’s advocates are declaring victory with Latvia’s battle against the European economic crisis and advocating it as the model for Greece & Spain to emulate.  Curiously, Latvians have been declaring this “win” by exiting their country.

The “austerians” are celebrating Latvia as the plucky country that through hard work and discipline showed the way out of the financial crisis plaguing so many countries.  For austerians, Latvia represents a veritable Protestant morality play demonstrating that austerity works.  Indeed, they hope the Latvian example will retread Margaret Thatcher’s “there is no alternative” tire for a European-wide scale austerity tour. Few writing on the subject unfortunately have the time on the ground to evaluate the economic and social costs of the Latvian model. While the Latvian government chose austerity, most of its people have not.  Feeling there is no acceptable political alternative available, many elect to emigrate.

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