From today, I am going to write a series of blog posts regarding the current state of Europe. Unlike what most people consider, Europe is in a much worse shape than what people normally imagine. Current economic hardship could be attributed to many different sets of factors, but it could be boiled down into two major forces: institutional failure and long-term macroeconomic forces. Further breaking it down, institutional failure comes from both fundamental flaws of the entire European monetary system and from weak corporate governance system. With regard to macroeconomic forces, I want to go beyond the traditional variables and extend this discussion to include cultural, social and demographic forces as well. All of these forces, in conjunction, led to today’s demise and will further undermine Europe’s competitiveness if not dealt adequately.
Today is an overview, in response to the latest stress test results.
Market responses after the release of the stress tests reveal that the banks’ instability across the European countries was not that severe enough to justify shortening credit among banks. In fact, the very notion of this stress test from the first was abating concerns over liquidity problems by enhancing credibility of the banks. Apparently, they seemed to have succeeded in this goal, but it appears not to be successful when we take into account of the fundamental problems.
Unfortunately, history does not provide any examples of this current “unique” situation; centralized monetary and fiscal policy unit, undertaking subsets of different political government roles at the same time. For the past decade, this new experiment has run successfully with no obvious issues protruding. Conspicuous problems have been concealed and dominated by incredible growth stories of Southern European regions. At that time, combined European system was commended by everybody. But, as the financial crisis unfolded, growth factors that led these countries success are now subject to closer inspection. In fact, growth did not derive from any fundamental ingredients in these regions; it was stimulated by invisible Keynesian forces, what I would call it. Essentially, artificially low interest rates made them to take on debts of the level that they would never able to service in the future, thus leveraging up their whole economies and derailing from natural rates. Now, it is very obvious for them to depreciate their currencies, but that option is not available under this current system. And to make this situation even worse, European countries are going under austerity programs by cutting fiscal expansions, which will in turn accelerate already existing deflationary pressures. How will these Southern neighbors be able to find growth and stop moving further from the track?
The answers so far provided are politically unreachable and economically incompatible; political in a sense that it is highly related with each nation’s job market and citizens’ sentiments, and incompatible in a sense that the stated austerity scheme and stabilizing the liquidity issue cannot be addressed concurrently.
