Europe's Steady Decline

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In Europe, discontent over the economy prevails. Prices fall in the Eurozone and this make the fear of deflation reappear.

Political debate is again stranded between austerity and incentives. On one hand, it’s in favor of austerity for obtaining reduction of public deficits, as shown by the example of Greece, which seems to be lifting itself from the depths of the abyss in which it fell, after going through a period of severe financial adjustments, imposed by the “troika” (The European Commission, The European Central Bank and the IMF), and on the other hand, by the dissatisfaction of the majority of the governments that confront an almost null growth (it was zero in this year’s second quarter) with price decline, because they can’t find a way of increasing demand through a real increase of internal consumption, that is, without increasing public debt in the hands of creditors who demand high yields and rigorous maturity terms.

Then again, looks go to the European Central Bank in order to come out of this jam. This institution is the one that massively buys the debts of its members, in an action similar to that used by the Fed in the United States to reactivate the economy. But, to execute this system, first the problem generated by the differences arisen between the different countries whose debt would be bought needs be solved. This doesn’t occur in the United States where its central bank (the Fed) is bought from a single government.

Until the ghost of deflation is dissipated, Europe will continue in crisis.

In the United States, expectations prevail in relation with the following measures of monetary policy.

On the basis of a modest but firm recuperation, with a 3.4% growth expected this year and the descent to a less than 6% unemployment rate, and once the gradual reduction of treasury bond buying on the part of the Fed has been implemented without altering the recuperation rhythm, the preparation of the ground for the first interest hike in more than a decade is planned (which has been maintained at almost zero by the Fed), which is an indispensable measure to further heal the economy and allow said factor to be determined by market forces. The task is delicate. Some officials believe that the sole mention of this possibility could create destabilizing effects on the rest of the world. Because of this, without prejudicing [the effects] produced in the middle term, in the meeting programmed for mid-September, and in the communique that follows it, maybe it will not go beyond suppressing the key parts of the texts used until now to maintain control over the expectations of rising interest rates.

In Latin America, a 2.2% growth is expected in 2014. Panama will lead the group of those who will grow, with 6.7%. It will be followed by Bolivia, Colombia, Dominican Republic, Ecuador and Nicaragua with numbers around 5%. The economies of Brazil and Chile, which were examples of expansion until recently, will suffer decelerations for diverse causes. Chile, due to the fall in the world’s demand for copper and Brazil because of its unexpected political turbulence and the high inflation which has been one of its causes. The debacle of Venezuela staggers between the fanatical preservation of a government with a declining thesis and the possibility of a power vacuum without knowing who could fill it up. And in Argentina, social discontent can lead to a governance crisis spurred by out of control inflation and the risk of being sentenced to ostracism by world capital markets.

In relation to China, this country was able to prevail in a short term thanks to the good maneuvering capacity of its Central Government, which at the beginning of the year was deemed an imminent financial debacle produced by the fall in the real estate market and/or the debt default of local governments as well as the low profit of non-financial corporations, aggravated by the high cost of financing their operations. In this scenario, a 7% growth is expected, which even though lower than the previous year’s double digits, will still constitute one of the most important engines of the world economy.

In the midst of this landscape, this month shares showed an average rise of 4% in the United States and 1% in Europe, with no significant variations in Asia. And in Brazil, in the middle of high inflation, the increase in August rounded 9%. Yields for public bonds continued descending in the United States and in Europe. In both places, investors are awaiting the European Central Bank to decide on the massive buying of state bonds from member states and whether the Fed will proceed or not to increase interest rates in the United States.

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