By Peter Switzer, Switzer Super Report

So here we are again keeping our fingers crossed that the European Union (EU) leadership can come up with something that will stop spooking and rocking stock markets. And it comes as I received a great, yet critical email from a subscriber ? the respected Professor Ron Bird of UTS.

Ron is concerned about my and other commentators' optimistic views on the euro drama. He challenges my hope that a bit of growth added to austerity will bring "happy days again". Not sure I used those exact words because happy days, I have always contended, will happen when the worst of the European debt problem is behind us.

I have been hoping that would happen by the end of this year but it was based on my belief that rational behaviour from Europe's leaders must eventually win out. I think the stock market will insist on it.

Growth vs. austerity

Ron argues that growth with austerity is an oxymoron, but I disagree. Austerity is simply a policy of deficit-cutting by lowering spending and/or raising taxation. A big deficit could create 4% growth, but an austere fiscal setting could force an economy to live on 1% growth, which would raise unemployment, but there would still be growth. The end-result might be 10% unemployment rather than 13%.

Austerity is not like pregnancy ? you can be a little, or very, austere.

Ron and others say Greece has too much debt it can't pay, but that's not right. They can't pay it in a preferred timeframe, but if they go through five years of reform, sell-off assets such as islands, boost productivity and get the population to pay the right amount of tax, they could repay their debts over time.

Anyway, if they lift their game, they could borrow to pay off current lenders and then take on new creditors.

Ron agues markets are stupid and that too much was lent to the likes of Greece, and I think he is right. He also insists that the eurozone proposition was dumb in the first place without a fiscal union and I agree with that as well, but this doesn't solve the problem.

Titanic troubles

Ron says the Greeks need to devalue their currency to get economic growth, but as they are on the euro, that little tactic to solve their debt problem is not available to them. He concludes: "All the attempts to solve the problem, while they remain part of the monetary union are just like 'moving the deck chairs around on the Titanic'."

He predicts the future this way: numerous banks around the world will have to write-off massive debts "and therein lies the problem, which is the reason that we should not be optimistic regarding any easy solutions."

Interestingly, he says there will be buying and selling opportunities helped along by optimistic commentators who contribute, "to the irrationality of markets and so masking the true issues from market participants."

Will the debt challenge be beaten?

Ron is a fatalist and believes this debt challenge can't be beaten and the day of reckoning will come no matter what. I reckon history says we muddle through crises like these and despite the flaws of Europe's monetary union, now is not the time to dump it. That would create uncertainty, kill off both business and consumer confidence, and send the world economy into a Great Depression.

The name of the game now is to take the 'Bernanke option' and print money in Europe and get growth happening. When economies are growing, you can create jobs, you can tax more and cut spending.

Europe has allowed the Germans to call the tune on what austerity looks like, but it won't be swallowed by Europeans. If the Greek radicals win the next election, Greece will be crushed by their own people who will hoard their euros, stop spending and the bankruptcy rate will race the unemployment rate to the finish line.

US-style bailout

On the bank and debt issue, the Yanks bailed out their banks with the Troubled Asset Relief Program (TARP) and most of that money has been paid back. Companies such as AIG and General Motors were saved using taxpayer's money and the repair job with them has been pretty good. The US is recovering and the stock market is up over 100% since the worst days of the Global Financial Crisis (GFC).

The optimists haven't led US investors astray since March 2009!

Even in Australia, we are up around 30% since then, which is 10% a year and with dividends and franking credits, you could be up maybe 15% a year. That looks better than term deposit rates. We're only muddling through, but that's what I have always predicted.

Sure the debt remains, but I prefer to think the next US president will engage with gradual deficit and debt reduction ? but the USA will need a growing Europe to assist in keeping the global economy strong enough to permit it to start getting its house in order.

One day Ron, we will see who was right, but I would rather bet on a muddle-through thesis than Greece leaving the eurozone, possibly followed by Spain! The effect that would have on European banks and what that would do to our Big Four banks as well as their customers with loans really is not something I want to contemplate.