Is this Europe, or was, or is becoming?

The number of variables by which any number of threads could snap is mind boggling!

Increasing unemployment, weakening retail sales, falling real incomes, falling investment, fiscal austerity, weak bank lending…..and of course the 15 month decline in the Composite Markit PMI

There is talk of the need for fiscal expansion and an end to austerity, but as Roger Bootle pointed out, in the telegraph, increasing government debt, especially in the periphery is something Germany does not want to do.  It risks ending up footing the bill. 

That we are getting closer to a denouement is clear, though the route and destination themselves are not; it is all too complex.  A break up of the Euro would not immediately be of benefit to those most in need, and debt monetisation in some of the more disjointed periphery might not help support bond prices and relaxation of austerity driven measures. 

It is not the negative numbers in themselves that are giving us uncertainty, but the duration of the drop and its impact on the natural rate of demand, investment and production in these economies.  Historical downturns have in the main been rather short and sharp, so much so that the underlying trajectory of key economic drivers essentially remained unaffected.  But this one, is not.  It is impacting employment (and hence demand) on a structural basis, government debt and deficits on a structural basis and gross fixed capital formation on a structural basis.  The underlying trajectory, if there is indeed still a trajectory, is much impacted. 

As with all downturns, the further the fall the closer you are to the eventual rise, but it is the latent and steep loss of “capital” on the way down that is the risk that people should be paying attention to.  Also of importance were the drivers of growth in the European economies post 2000 but pre 2008: many of these no longer exist by virtue of demand destruction within Europe, but weakening global growth is also impacting its key exporting economies, in particular Germany.   We need a dynamic internal readjustment, not just a burst in confidence and demand.  And Europe is anything but dynamic. 

The number of variables by which any number of threads could snap is mind boggling.  What I keep reminding myself is that low to negative economic growth should ultimately impact asset values and hence both the supply and value of debt and equity.


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