Recently, Europe’s economy has avoided appearing on many
of our news screens what with other international affairs such as Russia/
Ukraine, Syria and Iraq in the headlines for probably my entire summer
holidays. But that doesn't mean that the European economy is all hunky-dory and
the recession is a thing of the past.
This post is an update of what is actually going on in
Europe right now, giving you three key case studies: Italy, France and Germany.
Italy
·
Triple dip recession – GDP
fell by 0.2% in the second quarter of 2014
·
12.6% unemployment rate
·
43% youth unemployment
·
Little political will to do anything about it
France
·
Rising budget deficit
·
Last quarter’s GDP
growth: 0%!
·
Chance of going back
into recession, was also 0% in the quarter before last
Germany
·
GDP fell 0.2% in the
last quarter, the first GDP contraction this year
·
Manufacturing sector
slow down
·
Geopolitics is
affecting growth: Russia’s embargo on European food imports is apparently
affecting 9.5m European farmers, and is affecting Germany’s trade
Key points to
note about Europe right now:
·
Low inflation.
Average Euro Area: 0.4%
Deflation in 8 Eurozone
countries including the PIGS (Portugal, Italy, Greece and Spain)
Country in
Eurozone
|
Inflation rate
|
France
|
0.4%
|
Italy
|
-0.1%
|
Germany
|
0.8%
|
Spain
|
-0.5%
|
Greece
|
-0.3%
|
Portugal
|
0.4%
|
Why is this a
problem?
·
Increases
the real value of debt which means that government debt increases making it
harder to pay off and increasing the likelihood of needing another bail out
·
Taxes
will have to rise eventually to fund the increased debt accumulation which
means businesses will have a higher tax burden à
leaving some Eurozone countries
·
There is danger of falling into a deflation trap
where prices just keep falling. This is called a deflation spiral.
·
High
unemployment
·
High
government debt
·
Political
upheaval
·
Geopolitics
with Russia
·
Lack of
political union
Different countries in the
Eurozone want different things and have different views with how situations should
be handled, e.g. with Russia, which makes it hard to manage economic policy and
introduce austerity measures where needed.
What can be done?
·
Keep interest
rates low – increasing interest rates will just decrease inflation more
·
“Quantitative
Easing lite”: the European Central bank buys assets to stimulate the
economy and help inflation rise
Anything else?
·
Role of competition
in markets:
o There
was a period of very low inflation during the late 19th century in
Germany and the UK
o Analysis
shows there was competition in markets and businesses operated in a competitive
environment
o Competition
restricts wage growth because there are many companies in the same industry
offering the same job and the same wage. This is happening now!!!
o A
competitive market means that firms are unwilling to increase the price of
goods and services – preventing inflation from rising. This is happening now!!!
o It
is therefore hard to increase inflation. This is happening now!!!
