If Germany, France and Italy cannot find a way to refloat Europe’s economy, the euro may yet be doomed http://www.economist.com/news/leaders/21614137-if-germany-france-and-italy-cannot-find-way-refloat-europes-economy-euro-may-yet-be
That sinking feeling (again)Four years ago the Euro zone went through a massive banking and sovereign debt crisis. Three of its biggest economies are still dealing with its lingering effects. Germany is on the verge of a recession, France’s economy is in the state of stagnation and Italy is dealing with a GDP that is barely above the figures that it represented 15 years ago when it initially accepted the Single Currency (Euro). These three countries make up for the majority of the Euro-Zone GDP (two thirds). So the recent economic growth seen in places like Spain and the Netherlands cannot account for the overall decline.
A few months ago the Euro Zone leadership had expected them to be out of the previous turmoil with growth returning to normal. Countries effected most by the Euro Zone crisis were recovering after massive bailout and the implementation of measures to reduce budget deficits and ultimately increase market competitiveness. Even after such measures unemployment among the youth was still very high, however; it was going down in most countries.
For drastic change in terms of dealing with the effects of the Euro Crisis, public opinion needs to change and widespread acceptance of the implementation of tough reforms is required.
Another issue Europe has to deal with is massive austerity. An implementation of similar policies of quantitative easing are also as option that needs to be considered. Mr Draghi has hinted support for this. He hinted this specifically at Germany’s chancellor Angela Merkel who is very much inclined towards sticking to the Euro Zone’s rules on fiscal discipline. Similarly the German Bundesbank is against the implementation of quantitative easing.
The situation as of right now in the Euro Zone is very delicate and needs a decisive push by its leaders. If certain drastic measures are not taken then growth will not take place and could lead to deflation. Lost growth is very difficult to recover from, a prime example would be Japan which had to deal with a decade of lost growth in the 1990’s.
If the adoption of the Euro currency continues to lead to stagnation, joblessness and deflation then ultimately people will be inclined to leave the Euro. Which considering the current economic situation in the Euro zone is very likely.
I feel despite this bad situation in the Euro zone, especially in France and Italy, the government will still have enough scope for opening markets there. They are considered to be some of the wealthiest countries in the world, so there is still a lot of purchasing power available to those nations. The fact that this option does not necessarily translate into jobs can be explained by firms and investors not very interested to invest in those European nations. Hopefully they get back their good times soon.
ReplyDeleteI think with euro deflation in the horizon and with the slow growing American economy, now is the time that the US can close the currency rate gap between the two currencies. With that said, if the euro drops in value too much, stronger European economic power houses, like Germany, would opt out of the EU. Its been threatened before.
ReplyDeleteLike you said in your analysis, leadership is needed to make economic change but so is a change in heart in the European people. Most are under the impression that economic change is not needed, but deflation is a real threat going into the next few years and if policy changes aren't made, the euro will continue to weaken.