Europe is avoiding the root problems of its fiscal crisis in favor of politically driven decisions based on a simplistic austerity-versus-growth false dichotomy. The fears over Europe have pulled the whole market lower. That has created some greatly enhanced value among top name tech stocks.

Austerity and Growth

The policy alternatives for Europe have devolved into a simplistic, and false, choice between austerity and growth.

The perception is that austerity has been tried in a number of countries and failed. Therefore, policies to promote growth are required.

Yet, austerity measures as tried in most of Europe have been very limited. Total government spending is up in Spain and France over the past year, and down only slightly in England. Real spending cuts have occurred in Greece, but overall there have been few actual reductions in total government spending.

The major austerity measures in France have been to increase taxes and to raise the retirement age starting in 2017. These non-cuts presumably produced a populist backlash.

The pro-growth argument, which is now ascendant, is essentially the simple Keynesian argument that more government spending is needed.

Yet, there are major differences between different types of spending such as infrastructure expenditures and larger pension checks. Both may provide a temporary mathematical boost to GDP, but they will not produce equivalent long-term results.

The Demographic Problem

The root problem for most of the countries in Europe where deficits are out of control is that social spending on pensions and health care is too high, and will rise dramatically in the future. This is coupled with a serious demographic problem.

The future in many European countries is one of more and more people collecting checks from the government while there are fewer and fewer workers to tax. Both sides of the equation are a problem.

Below are the expected 2012 fertility rates in major European countries. A level of 2.1 births per woman is replacement level.

The problem is more acute in some countries than others, but the fertility rate for the European Union as a whole is just 1.58 (Source: www.cia.gov World Fact Book).

This is not a new phenomenon either. The fertility rate in many countries has been below 2.1 for years. Italy dropped below replacement level in 1977, Greece in 1981, Spain in 1981, and Portugal in 1982.

The implosion of the workforce has been building for years.

It doesn’t have to be a problem with sound fiscal policies. Germany’s birth rate was below replacement level as long ago as 1970. But many of the countries that require fiscal reform have implemented more generous pension systems than Germany and simply have not adopted sound, long-term spending plans.

Populations will decline throughout these countries in the decades to come. The ratio of pensioners to workers will rise significantly, and increased life expectancy exacerbates the ratio problem.

Until this issue is addressed, simply ramping up some Keynesian spending to bump GDP 0.5% for a year or two may alleviate the fiscal problems, but it won’t solve the root problems. Japan went through numerous, massive stimulus programs, and still ended up with a lost decade (or two).

Keynesian stimulus labeled “pro-growth” is a lot easier political sell to voters than “austerity” measures that raise future retirement ages. But it won’t address the long-term problems.

Many European countries need to reform their pensions and retirement ages, or the demographic problem will simply make fiscal problems increasingly intractable.

Market Impact

Fears over a credit crisis in Europe have clearly been the factor driving down the stock market the past month.

This sinking tide has impacted all sectors. There have been some values created, particularly in technology stocks.

It is commonplace, when technology stocks are running, to have analysts say, “I love the stock but investors should wait for a pullback before buying.” Then, when the stock does go down, most analysts focus on the downtrend rather than stepping up and saying, “OK, now buy on the pullback.”

Well, here are some stocks that have pulled back sharply that have much improved, good valuations.

(Note: P/E rations may vary from other sources due to operating earnings adjustments)

It is not our intention to recommend these stocks. There are many investors, however, who might have avoided the hot running stocks earlier this year.

Investors waiting for a pullback in any of these stocks might find now a very good time to review whether there are opportunities - depending upon individual risk-reward parameters and portfolio balance.

What It All Means

Europe didn’t come close to solving its long-term problems this weekend. In our opinion, the new emphasis on “growth” rather than needed, long-term structural reform of pensions in certain countries may even prove counter-productive.

Countries with problematic fiscal deficits must come to grips with the actuarial tables and their promises to pensioners.

The European debt crisis will grind on for years. At times, it will appear as if disaster is imminent, and other times it will seem as if a new solution has been developed to overcome the current problems.

Right now, the issue has pushed US stocks lower across the board. That has taken down stocks that probably won’t be impacted much by any European recession. This includes a lot of technology stocks that are growing and have excellent valuations.

For those looking to increase long-term exposure to the technology industry, now might be a good time to look at a variety of high-quality stocks.

Dick Green

Founder and Chairman, Briefing.com