The Three-Legged Stool Of The Economy Is Already Missing Two Legs
Peter Stock, Stock Investment Management Inc
Last year when the Euro was soaring and the dollar collapsing there was some frustration articulated by Euro zone policy makers that it was economically counterproductive for the Euro to be too strong. Well I guess, as we watch the Euro’s recent slide, these Eurocrats should have been more careful of what they wished for. I doubt that any of them ever anticipated the balkanizing circumstances that would lead to a lower valuation for their once high and mighty currency. In fact the way things are working now with the abrupt change of direction for the Euro it could in fact hasten the further dissolution of the grand EU/EC/ECB experiment. How so? Well it is clear that a weaker Euro will help the larger EU “Have” states like Germany and France. Many assume that they have the financial strength to weather the global economic storm. Not so for the weaker EU peripheral states…particularly in the Southern Club Med neighborhood. With EU and IMF austerity programs now in play and spreading to some of the former Soviet Bloc states…this will only serve to irritate further the fiscal and monetary imbalances that exist between “The Have” and “Have Not” EU states…..and this in turn, I believe, will only hasten the departure of one or more members by either sovereign default or Eurocrat design.
What is more difficult to forecast is the global deflationary impact of spreading austerity programs throughout the Euro zone. Sure, France and Germany will benefit from the weaker Euro…but will that positive growth be neutralized by the creeping recessionary environment in the Rest of Europe (ROE)? We believe that the best case scenario will be a flat economy in the Euro zone…..but that forecast is subject to risk on the downside. Why? Germany…the strongest EC economic link..relies heavily on exports….the broader global problem is, which region/country is going to pick up the global consumption slack? If the Germans plan on continuing to run a trade surplus to jump start growth…who is going to run a trade deficit to offset it?? The US?…I don’t think so. The world still suffers from too much capacity and not enough demand. We have pounded on this theme now for months…and we are still fervent believers in it… this thesis includes the thought that the world’s consumer of last resort in the past…The US….cannot be counted on in the future. Our economy, thanks to numerous policy errors and miscues, remains on the skids….and the skid is in the direction of a double dip not toward sustained growth momentum. The recent weaker employment, housing and retail sales data only reinforces this forecast.