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EUROPE’S CRISIS IS WORSENING

Good read here from the Washington Times on the crisis in Europe. It’s easy to forget that we are in a global economy, but remember that as much as 25% of earnings come from Europe so it’s important not to lose sight of the global picture.

Exceprt:

Europe’s economy has lagged considerably behind that of the United States during the last quarter-century. A great deal of Europe’s poor performance can be explained by a larger government sector (higher taxes and government spending) than had characterized the U.S. economy – at least up to now. Europe has also suffered from a much worse demographic situation than that in the United States.

Because of very low birthrates, European countries have an unfavorable dependency ratio (number of people receiving retirement pensions versus number of workers) compared to the United States. And this will only get much worse. Italy, and many of the countries in eastern Europe, are already losing population, and Germany is not far behind. Given these structural problems, it will be very difficult for much of Europe to achieve a quick and robust recovery.

European banks face a different situation from banks in the United States. In the United States, companies rely on banks for a much smaller portion of their capital needs than do companies in Europe. American companies are more prone to tap stock and bond markets for financing than their European counterparts.

As the recession deepens, more and more European banks will face nonperforming business loans, and, unlike the United States, there is no eurowide institution (like the Fed) with the authority or capability of serving as the lender of last resort for the private banks. Many of the individual countries in the EU are too small (unlike France or Germany) to be able to bail out their big banks. Since they cannot, they will not.

Source: Washington Times

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