Thursday , 29 February 2024

Europe’s Economic Recovery Has Run Out Of Steam! Here’s Why

The fact that Europe’s economic recovery has run out of steam should have come as no surprise to European policymakers considering:

  • Europe’s restrictive economic policy setting,
  • the poor state of its banking system,
  • the still very strong Euro and most of the countries in the euro zone are still engaged in meaningful fiscal adjustment within a Euro straitjacket that constitutes a major headwind to economic recovery,
  • Europe lags well behind the United States in addressing its banking sector problems and, until very recently,
  • a strong euro has dented European export prospects.

Despite Mario Draghi’s brave pronouncements on the European economic outlook, there would seem to be every prospect that the European economy will weaken further in the months immediately ahead:

  • the policy setting remains largely unchanged and
  • the high frequency economic data are suggesting that geopolitical uncertainty around Ukraine and the Middle-East is exerting a larger than anticipated adverse effect on the European economy in general and on the German economy in particular.
  • There is little reason to expect that this geopolitical uncertainty will dissipate anytime soon.
  • At the same time, it would seem highly unlikely that the modest monetary policy measures adopted by the ECB at the end of June will do very much to offset the strong headwinds now confronting the European economic recovery.

One of the more disturbing aspects of the European sovereign debt crisis has been the tendency of European policymakers to engage in wishful thinking and to remain in denial. Indeed, throughout the crisis they have been blindsided by events and they have clung to the hope that something will turn up that will finally put the European economic recovery on a firmer footing. Sadly, they seem to be again engaging in such wishful thinking as they:

  • underestimate the very real damage that deflation can do to a highly indebted economy, and
  • continue to underestimate the combined negative effect of budget austerity and an ongoing credit crunch on the European economic recovery

With inflation now running at around one quarter of the ECB’s inflation target and with large gaps still characterizing the European labor and product markets, it is difficult to understand why the ECB is:

  • delaying a more aggressive and proactive response to Europe’s very real deflation risk and
  • so resistant to rethinking their basic approach to the European sovereign debt crisis considering that a policy recipe of budget austerity and economic structural reform has not delivered a meaningful European economic recovery.

Hopefully the recent stream of negative economic data coming out of Europe will shake European policymakers out of their present state of complacency, but if it does not, we should brace ourselves for very rough going in the global financial markets when the U.S. Federal Reserve starts the process of normalizing interest rates.

Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.


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