Wednesday, September 24, 2014

Euro-zone And Draghi Both Mired In Trouble

Nothing resolve-Problems Ahead
ECB President Mario Draghi's last move towards more QE is no more than stupidity on steroids, even words like misdirected and boneheaded do it a disservice. This is more proof that the Euro-zone is in big trouble, both the union and the flawed currency is again begging to crumble. One is forced to wonder if Japan and the Yen will crash first considering how each day Japan slides closer to the economic abyss or whether the Euro will lead the way into the wastebasket.

The European Commission recently said they expect the 18-nation euro-zone would grow by 1.2% this year and 1.8% next year. In both cases, the figure was 0.1 percentage points higher than in earlier predictions. The wider 28-nation EU's prospects have been revised up by the same amount, to 1.5% in 2014 and 2% in 2015. "Recovery is gaining ground," said Olli Rehn, commissioner for economic and monetary affairs. "The worst of the crisis may now be behind us." However, he also warned that the recovery was "still modest".

Those in power seem to forget that nothing has been resolved and they are squandering precious time. This comes as the UK Office for National Statistics (ONS confirmed their economy grew by 0.7% in the quarter, unchanged from its previous estimate. However, its estimate for growth in 2013 as a whole was cut to 1.8% from the initial reading of 1.9%. These numbers are nothing to celebrate considering the great lengths and expense gone to in order to achieve them. Even after billions of pounds in PPI (Payment Protection Insurance) payments, massive stimulus and super low interest rates the area seems mired in slow growth at best.

As troubling as the slow growth is the lack of real reform is more problematic of deeper issues. For example in the text of the communique issued by the Group of 20 finance ministers and central bank governors after the February 2014 meetings in Sydney the European Union assured the Group of 20 nations that a public backstop for euro-area banks will be "available within a decade". So much for decisive action, this comes as even now EU member states remain divided on the issue. It seems to me that we are often prematurely lead to believe or reassured by the media that this has already been done or is coming just around the corner.

Draghi recently said that his “biggest fear” is a protracted stagnation in the euro area that leads to high unemployment becoming structural. Forecast show joblessness gradually being reducing over the next two years from a record high of 12 percent, to 11.8 percent this year and 11.4 percent in 2015. It should be noted the upturn predicted across Europe conceals a splintered recovery, in which smaller, eastern European countries like Estonia, Latvia and Slovakia, which joined the currency union within the past five years, look toward growth of at least 3 percent in 2015 while some of the euro’s larger founding nations like France and Italy continue to struggle.

Tension about the way the EU has dealt with the debt crisis could erupt this month when voters from the 28 nations elect members of the European Parliament for the first time since Greece nearly brought the euro currency bloc to its knees. The required bailout unleashed a wave of German-led austerity demands that continue to rile several of the more indebted nations. A moderate deceleration in growth and world trade coupled with geopolitical risks over Ukraine and tensions with Russian have not been the foundation needed to propel the Euro-zone forward. As of today it is easy to say many issues remain unresolved.

Footnote; Please feel free to explore the blog archives and as always you comments are encouraged. Below are two articles that delves deeper into the politics that have caused the talkaton in the Euro-zone and the debt problems in Italy.

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