Wall Street rallies on EU deal

The European Union reached a deal in principle.  No facts have been hammered out yet and they aren’t expected to be worked out for months.  The main focus of this new deal is for the EU members to adopt some form of balanced budget amendment.  The goal is for each country’s annual deficit to be not more than .5% of their Gross Domestic Product (“GDP”).  Some form of sanctions would apply if a country’s deficit exceeded 3% of GDP.

While I agree it is great long term news.  The problem is that in the near term, I don’t see how they can accomplish this.  The EU has numerous countries that are in financial hardship.  Its one thing to come up with a balanced budget plan, but it’s entirely different to put that plan in place.

Obviously, the United States isn’t part of the EU.  But let’s see how this budget plan would apply to us.  The US is estimated to have GDP of $15 trillion for 2011.  Based on the EU plan, our budget deficit would need to stay below $450 billion for ‘sanctions’ not to apply.  The US has had budget deficits in excess of $1 trillion for the past three years and the deficit is expected to reach $1 trillion again this year.  Our own ‘Super Committee’ couldn’t figure out how to cut $1.2 trillion from our budget over 10 years.  If they couldn’t come up with the equivalent of $120 billion in annual deficit savings, how in the world would we cut $550 billion out in one year to meet the EU plan?

How is the EU going to get 17+ countries to meet a threshold that the US has no chance of meeting?  Many of those countries are in worse financial shape that the U.S.  Even funnier, how do you sanction a country that is having financial hardship?  Do you assess them a fine that they can’t pay?  Do you impose a tariff on their imports or exports to further penalize their citizens?  How do you make a sanction work?

I’m left scratching my head, “why is Wall Street rallying on this new?”