Calm Economic Scene, Tense Political Scene

The beginning of the year’s second quarter occurred within a calm economic but a tense political scene, due to the Ukrainian crisis.

The predominant thesis is that the United States and Europe confront Russia with equal objectives but different attitudes. Both don’t wish for a new world order created through an increasing influence of Russia. Even though it may not be socialist/statist, is governed autocratically, without the real predominance of the rule of law, without separation of powers, supposedly led by a cabal that’s become rich while commanding a single party. But, while the United States proposes a severe attitude, that points at undermining said cabal with sanctions and restrictions, Europe, where many countries maintain active commerce with Russia and depend on it for fuel, presents a less confrontational attitude.

Notwithstanding what precedes during the period, the stock exchanges have not reacted with fear. Stocks have not moved perceptibly, except in the technological area, where they were noted low in the Nasdaq index. Prices of sovereign bonds continued to rise slowly, though, pointing to historic cycles and theorizing. It is beginning to be said that a “correction” could be arriving, since the rising in share prices has had a long ascending period. It could be that this calm is due to the news in the decision of continuing onward with the TTIP (Transatlantic Trade and Investment Agreement) between the United States and Europe. The conversations regarding TTIP began in 2013, and which was first seen as a commercial treaty, but now, seeing Russia’s reappearance in the world game board, it is projected now with bigger dimensions, as a demonstration of what during the Cold War was the Western Union, which originated NATO, the strategic and military union which opposed the soviet threat in Europe after World War II. In the short term, TTIP has an objective to free Europe from its dependency on Russia in respect to its gas and oil supply through lifting the restriction for the export of these two products from the United States to Europe.

The IMF continues warning Latin America to adopt conservative positions in public spending, before the imminent diminution of the Chinese volume of imports, which would be due to the deceleration of the growth of its economy and the fact that the slow financial recuperation of the United States and Europe won’t compensate for it. In fact, the numbers shown at the end of April reveal that the United States did not sustain during the first quarter of 2014 the same rate of growth it had at the end of 2013. In Europe, even though the ghost of recession recedes, the road to sustained growth has not been found. In many places, unemployment is excessive and the slowness in price increases threatens the advent of deflation. Because of the possibility of these lowering, people postpone all types of purchases, which creates the worst kind of negative spirals, since the induced diminution in production due to low demand entails an increase in unemployment.

But Europe takes positive steps and emits signals that its recuperation solidifies.

On the one hand, the European Parliament approved, in the middle of the month, a system (which still requires the confirmation by the council of ministers) for the handling of the banking system, which overcame the differences between the northern nations, like Germany and Finland, against France and other southern nations, like Greece, in relation to delicate issues, like the sharing of responsibilities in the banking fall and the way of defining their viability. They created a deposit guarantee up to 100,000 euros, which are measures that will return confidence in the European banking system, one of the most damaging sequels of the great recession that began in 2008. On another hand, Greece, even though with difficulty, has  achieved the approval of the European Commission to receive another segment of $6.3 billion Euros in rescue funds and made it back to the bond market after more than four years of absence, because it achieved a fiscal surplus of $1.5 billion Euros (before debt payment) in its fiscal budget. And Spain, another of the countries most hit by the 2008 crisis, states that economic growth has finally returned. The liberation of the labor market and the recuperation of the banks health brought back competitively and exports have increased perceptibly. As a result, investors have returned. As an example, Spain’s sovereign bonds now have a yield of 3.2%, very distant from the 7.6% they were offering in July 2012.

Finally, one of the measures, which is insistently talked about to stabilize the recuperation of all of Europe, is the convenience that Germany increase its salaries in order to increase its consumption not only of its own products and services but also those of the countries in recuperation, as Spain, Greece and others of the so-called periphery. This is based on the following facts: In the last 25 years, income in the European middle classes saw significant advances, except in Germany, in which from the year 2000 until 2010, the increase was 1.4% total. And the rest of the German working class only saw an increase of 0.4% annually from 1990 until now. This stagnation had a good reason; it was intentional, and it was tied to the fact that when German reunification occurred in 1989, its salaries were very high compared to the rest of Europe. Social policies were also very costly for the treasury, which was going to stop adequately incorporating into that countries’ economy the workers coming from East Germany. But that policy of salary stagnation, which had as a result a great increase in German exports to the rest of Europe due to its increase in productivity, brought with it the indebtedness in fiscal cash for those countries that lost competitiveness in the markets and saw a reduction in their exports. When the crisis exploded, it was mainly German money accumulated by favorable payment balances in the previous years, which went back as rescue loans to the indebted countries. Now a reversal of that situation is contemplated, through the increase in the remuneration of the German workers so that they consume, travel and use the services and goods of the countries that owe them those loans. In this way is that it is possible that when the year 2014 is averaged out we may affirm that we have had a moderate and smooth economic development stage.

 

 

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