Earlier this month it was reported that Spain will overshoot its targeted budget deficit by nearly $20 billion.  Spain’s deficit target of 6% of GDP was a commitment it made to the European Union.  Instead, their deficit will be 8% for 2011.  Missing the target in theory requires Spain to take austerity measures that include budget cuts and tax increases.

Spain is not the only European country to miss the prescribe targets.  Previously, Greece, Portugal and Italy missed their deficit targets.  It is this lack of fiscal responsibility that the has created to the ongoing European sovereign debt crisis.  For too long member countries made fiscal promises that they had no intention to keep.  However, the piper must be paid and this has worldwide economic consequences.

The conundrum for Europe is that even if the affected countries install the required austerity measures necessary to bring them into compliance with Europe’s regulations, it will be an additional drag on their economies.  Cutting government spending and raising taxes are contractive forces.  However, not meeting the debt to GDP ratio will cause the bond markets to increase the cost of borrowing for the affected countries, increasing their debt ratios even further.

In Europe, there are no good solutions, only some less painful than others.  The choices are difficult, especially in democracies that have created so many dependent citizens.  This reality has led to significant economic news during the first month of 2012 including:

• The Wall Street Journal reported that even though Spain has a huge housing glut, some of its banks are investing in building still more houses in order to avoid writing off bad loans.  This is an example of unintended consequences of government interventions and bailouts that will ultimately result in still larger financial problems down the road.

• France and eight European countries suffered ratings downgrades.

• Earlier this month Germany sold €3.9 billion (Euros) six-month bonds with a negative yield of 0.0122%.  In other words people paid German to take their money.  This bit of illogic shows the depth of the growing fears in Europe for sovereign and commercial banks debt.

• The price of gold increasing by over 7% in January.

• German Chancellor Angela Merkel stated her country’s unwillingness to spend more to bail out weaker European countries.  The end-game for Europe’s turmoil can only be temporary help up by German money.  Without it, the sovereign debt crisis in Europe will come to a head in a matter of months, if not weeks.

• The Federal Reserve announced yesterday that they will keep short-term interest rates close to zero “at least through late 2014,” longer than previously indicated.  With this announcement Fed is stating its concern for the economy into the future.

As this Blog has proffered previously, the economic problems facing many countries today is not liquidity; the problem all of the bailouts and governmental interventions attempt to address.  The real problem is one of excess debt, both in the private and public sectors.  This debt must be paid back, often referred to as deleveraging.  It will be a lengthy and painful process.  Unfortunately none of the politicians running for the White House, or the man currently occupying it, is honest enough to share this reality with the electorate.  To them the prize of the Office is just too alluring.