What happened to Europe last year?
2014 was supposed to be the year the Euro left its debt problems behind. It was supposed to be the year the credit crisis countries proved that they can balance their budgets. It was supposed to be the year for growth to take off. What happened?
First, Russia and China got in the way. Europe sells a lot of goods and services to these two countries—almost $300 billion. That’s 50% more than the US exports to the entire world. Between China’s economic slowdown and sanctions imposed on Russia over the Ukraine crisis, European exports have been stagnant.
In addition, Europe still needs to loosen up on labor restrictions. It remains stubbornly difficult to do business in southern Europe, especially.
Often reform proposals are placed in a simplistic austerity/stimulus context, which distorts the issues. Also, trade unions and large corporations resist these reforms, which would reduce their political clout.
Ultimately, Europe’s economic future rests on institutional reforms that will allow labor and capital to move where they are most needed. But they need the political will to get there.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!