One of the more common comments about the on going Euro disaster, and one that is constantly pushed on CNBC, (especially by Kudlow in the evening) is that what it represents is a failure of the European Social Democracy model. If that were the case, one would expect that within the Euro Zone, that there would be a clear distinction between the level of Government Spending as a percent of GDP and the level of interest rates for a 10 year note. If investors really thought that it was all about the government spending too much (and not just spending to much relative to the taxes they take in), then the market would be punishing the countries that spend a lot, and rewarding those that have relatively small government sectors. The graph below, (from http://krugman.blogs.nytimes.com/2011/12/05/no-its-not-the-welfare-state/) shows this is clearly not the case. The countries in the most trouble are right in the middle of the pack.
If the disease is not properly diagnosed, the probability that the right prescription will be written is low. Pointing to the level of government spending alone, rather than to the budget deficit, and actually more importantly the trade deficits of the various countries in Europe is a serious misdiagnosis of the disease the Europeans are facing
