Reading Between The Lines: Why Eurozone Improvement is Being Ignored

Published on the Front Page of Huffington Post Business

Markets have shrugged off improvement in the Eurozone because more is needed for stability. Rising demand for German goods, an improving business climate and stability in Spanish housing should have given markets cause for celebration. However, after the substantial rally we’ve seen, and the headwinds yet to be tackled within the region, caution has crept back into markets.

Absence of Growth and Currency Risk

There is deep concern over Europe’s ability to kickstart growth, as austerity measures dampen economic expansion and a strong euro stifles exports. The increase in demand for German factory goods interestingly was driven by demand within the euro area. Domestic demand was weak and the currency still source of concern abroad. Furthermore, despite an overall improving business climate, uncertainty in the political and economic landscape going forward is causing delay in hiring and investment.

Spain Precarious and Firepower Lacking

Once again hitting the headlines, Spain could derail European stability, as corruption charges are directed at the government while they continue to grapple with a large budget deficit. The latest data points to a possible floor in Spanish housing prices but defaults on bank loans due to the real estate bubble remains elevated and there is only limited further financial aid available directly from the rescue fund. In order to meet its main obligation of lending to struggling countries, additional direct bank aid has been rumoured to amount to less than €100bn, nowhere near enough to contain future turmoil!

Reform and Unity Needed

With France expected to have slipped back into recession, Draghi, the European Central Bank President, is right to warn that the region is not in the clear yet. What’s needed now are structural reform and closer fiscal and political unity. Only with a return of confidence, based on improving fundamentals, can stability return.

rafa-sanudo-euro-crisisstock market

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One comment

  1. I have been following your excellent coverage on CNBC and your blog. Last night I had the pleasure to listen to Vice President of the Federal Reserve Bank of Dallas, Harvey Rosenblum. His lecture was about the U.S. failed policy and inability to address the “Too Big To Fail” problem with the 12 major U.S. banking institutions (as well as the 20 more worldwide), that still maintain massive leveraged risk positions, coupled with the implied understanding that the governments will continue to maintain a safety net. From his perspective, nothing has really changed from 2008 to the present and that the government has now shouldered the private sector risk as well as debt, to an extent that the U.S. Federal Reserve is now adding not only U.S. treasury liabilities to their balance sheet, but also mortgage back securities. However, in a private conversation with him, on the macro view it is far worse. As he had no real answer to the current and expanding Federal monetary policy (buying over 70% of U.S. bonds) that has become a subside that the U.S. government has relied upon to continue to fund deficit spending. How can the Fed stop? His answer, was nothing more than “hope”, in my opinion, as it relied on the very banks he criticized to start lending and seeing a rise in consumption. In simple terms to inflate and spend our way out, betting on the future of consumption. However if history is any measure, no nation has inflated their way to prosperity. He certainly seemed to lean far more Austrian than Keynesian, but as he is – in some respects – in the belly of the beast, it is certainly hard to remain an objective Austrian. He was far more candid for someone serving in the Federal Reserve.

    While his focus was primarily the U.S. banks and debt issues, he did mention the problem is not unique to our shores and similar problems remain across the Atlantic. What I am interested is in your view of this precarious balance between the central banks subsidizing government deficit spending and managing REAL inflation (not the cost of living, such as the CPI)? Furthermore, at what point does the Troika either require such stiff austerity measures that the Club Med countries in desperate need of capital say no or that the Troika (via pressure from Germany) stops the endless funding?

    Personally, I feel the majority of growth we are experiencing in the States is primarily driven by government stimulus and far less than any real growth measures from the private sector. I found Mr. Rosenblum’s lecture not only extremely informative, but also refreshing from a non-statist Keynesian view. He is certainly very concerned and the truth of what he knows hangs about him like the weight of the world on Atlas’s shoulders.

    Here is a link to his presentation (note: it starts on page 13) http://www.dallasfed.org/assets/documents/pubs/mm/wc/130201endingTBTF.pdf

    I look forward to your comments and thoughts.

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