I was watching this CNBC video with Chase’s Chief Economist Anthony Chan who cites three reasons why he thinks Europe is struggling:
1. Q1 weather in Europe hurting Q2 numbers.
2. Negative sentiment.
3. A lack of ECB action.
I don’t know about all of that. Those sort of sound like lame reasons for the lagging growth (no offense to Mr. Chan). I have three reasons of my own:
1. A flawed currency union.
2. A flawed currency union.
3. A flawed currency union.
This environment is and has been the result of the flawed currency union that is acting a lot like a gold standard handcuffing Europe’s economies. We experienced a small bounce back in the last few years from a minor trade rebalancing, but it’s been far from enough to generate substantial growth. And all the while the recovery has been very uneven with many of the periphery countries continuing to suffer. The Japanification of Europe is continuing.
The Euro remains an inherently flawed currency system that has no efficient rebalancing mechanism. The ECB has done enough to quell solvency concerns at the sovereign level in the peripheral countries, but the ECB cannot fix the inherent imbalances that have arisen.
I continue to think that the only measure that can efficiently resolve this is a form of fiscal transfers that turns Europe into a single currency system with a national treasury that acts as a redistributive entity to help the current account deficit countries in the process of rebalancing as the existence of the single currency makes trade rebalancing a highly inefficient process (unlike the USA’s system). Until this is done I have a hard time seeing how the problems on the periphery can be resolved. As I’ve said a million times over the years the debts will continue to rise relative to growth because there is insufficient demand. The lack of a real resolution here means continuing high sovereign debt levels, continued austerity and aggregate demand that is too weak to sustain high levels of growth.