A Euro China-Syndrome?

Is the Euro-zone stuck?

It seems like they’re mired in a mess of their own making. There’s no desire to go backward and de-integrate; there’s not much interest in moving forward with stronger pan-European institutions; but it’s economically unsustainable to stay where they are. At present, Europe’s economy is stagnating. As anemic as our post-Crisis recovery has been, theirs has been worse:

Source: Eurostat

A second downturn started after their monetary crisis in late 2010 and never really stopped. Proposals for getting out have included a coordinated tax-cut combined with quantitative easing by the European Central Bank, or just QE by itself. In either case, Germany stands in the way of more liberal economic policy. Any kind of bailout of economically weak nations is likely to raise the profile of anti-Euro parties, which are currently a minor—but growing—political faction.

It wasn’t supposed to work this way. Moving some institutions to a supranational level was supposed to create a chain reaction: successful assimilation would create additional support, and unsustainable partial measures would result in crises that forced further integration. Euro-integration would be a ratchet where steps to resolve contractions would generate new problems that required new steps forward, eventually evolving into a kind of United States of Europe.

But with Euro-zone unemployment stuck in the low teens, Euro-sclerosis has set in. The chain reaction has worked, but only so far. A collapse of the Euro could create conditions where countries abandon the common currency and dramatically restrict the free movement of goods, capital and labor. Like all chain reactions, European integration contains the risk of a meltdown.

Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
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