The memory of the European sovereign debt crisis only a few years ago, is still very raw, especially to those who lived in the region and experienced the impact first hand. Recent economic data from the Euro region has provided evidence that a secondary recession could be imminent, and that has investors extremely worried.
Comments from the European Central Bank (ECB) President Mario Draghi at the recent Jackson Hole economic symposium in the US, triggered a great deal of uncertainty amongst investors in the Euro region. He stated that something drastic was likely to occur, either during this weeks’ ECB (European Central Bank ) meeting or the following month.
Draghi stated that small scale asset backed securities purchase program will need to be implemented. This is in the form of buying assets from the banks, providing a cheaper form of funding and liquidity. The problem is that the stock market is getting ahead of itself and is already pricing in this type of QE (Quantitative Easing).
Optimism for the Eurozone has evaporated after a 3 year recovery has seen the debt crisis of Portugal, Italy, Ireland, Greece and Spain (referred to as the PIIGS), fall into the background of a recovering EU economy. Driven by Germany and the UK, the EU has slowly been following the US recovery.
However, Germany posted a -0.2% GDP growth rate for the first quarter 2014, and if a 2nd negative growth rate is recorded, is technically in a Recession. Whereas Italy has only had 1 quarter of positive GDP growth rate since late 2012. The EU figures for the first quarter this year came in at 0% growth rate, and are poised to trigger a “Recession” as well.
Economists Fear Inflation and Deflation
Economists are in fear of inflationary problems. While certainly contained well within central bank parameters, the lack of inflation is a handbrake on the growth for the region. In addition, the fear of deflation (a decrease in the general price of goods and services) is also driving the activity of the central banks.
The ECB (European Central Bank ) relies on inflation expectation data, meaning they have a limited scope for how to tackle the growth issues of the EU and what measures to implement. Their focus should be on the balance sheets and reducing debt – the key problems of nearly all developed nations in the world.
The problem with the worlds’ financial systems, as proven with the 2008 Global Financial Crisis (GFC), is that there is too much debt. The Bank for International Settlement (BIS) stated in late July that the world is just as vulnerable to a financial crisis as it was in 2007, but that debt ratios are now far higher (up by 20% in developed nations). But more so in the emerging markets.
Central Banks will be releasing their monthly statements this week, and economic eyes will be watching intently. The US Federal Reserve will release their Beige Book on Wednesday, the Japanese Bank of Japan on Thursday and the ECB (European Central Bank ) on Thursday.
Something needs to be done. It’s just that investors don’t have the confidence that the ECB (European Central Bank ) can be bold enough to take a hard approach to reducing debt, but instead, follow the flawed approach of QE (Quantitative Easing)stimulus.
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