Europe Needs To Generate Growth In Its Economy

In the current world’s economic scenario the following elements are highlighted: the stable moderate growth of the American economy, the alarming risk of deflation in Europe, the drop in oil prices and the measures to be taken in China to stop the deceleration of its economy.

Within this drop in oil prices counter-posed interests are moving: some purely financial and others with the appearances of geopolitical maneuvers. For example, it is speculated that pushing oil prices downwards is consonant with American and Western Europe interests in weakening Russia’s economic capabilities, whose budget depends essentially on its gas and oil exports, and whose ability to maneuver depends in its capability for dosing the delivery of said products to European countries. On the other hand, from a global financial point of view, the consideration is that a reduction in fuel expenses, with a direct impact in worldwide transportation costs would allow consumers to use those savings to acquire other products, which in fact would help the Gross Domestic Product and employment rates worldwide. The decision Friday by OPEC regarding not decreasing production, which was procured by some producers led by Venezuela and Russia, produced the effect of deepening the fall in prices, which crumbled on Friday November 28 to $70.15, a new four-year minimum.

In China, where we observe a stagnating of the manufacturing sector and the deceleration in the real estate market, which affected steel, cement and related products demand, an unexpected cut in interest rates has occurred, a fact that seems to be aligned with its authorities’ intentions of creating “new growth engines” to compensate that deceleration in the world’s second largest economy.

The American economy looks relatively strong. The report says that it has grown to an annualized 3.9% rate and its employment rate continues to improve. Nevertheless, both in Washington and in the rest of the world, the fear is that it alone cannot stimulate global world growth.

The problem is Europe and the Eurozone: the Gross Domestic Product, which is the fourth part of the world’s total. Europeans have shown themselves incapable throughout almost a seven year period, which began with the 2008 crisis to generate real growth in its economy. This comes as a consequence of the confrontation between two tendencies that have been unable to reconcile. On the one hand, the European Union rules that prescribe the deficits in its members’ fiscal budgets cannot exceed 3% of their GDPs along with the imposition of austerity measures plus state disinvestment to the countries which needed rescue loans to avoid default in their sovereign debts or of their banking systems, a method which, led by Germany and other lender countries from northern Europe, is supported by the fact that some peripheral countries, like Ireland, Greece and Portugal to mention some of the least developed, who have made the biggest efforts to restructure their fiscal deficits through austerity, are showing signs of growth. On the other hand, the governments of Italy and France, who encouraged by the criteria, which is beginning to be defined by both the European Central Bank and the International Monetary Fund, have openly declared that the 3% GDP goal as its maximum of their deficits won’t be achieved in the present year, and that this objective will have to be postponed because the correct thing to do is to substitute it to implement measures which will raise employment rate, private consumption, consumer confidence, facilitating credit for encouraging investments in business and other structural reforms, as well as labor flexibility.

The truth is that inflation, an increase in the price of goods and services, is almost zero, which is insufficient and way below 2%, which is considered the adequate number. Salaries don’t increase, the unemployment rate in the Eurozone (18 countries) is 11.5% and the average of the European union (28 countries) is 10%. In Italy, the unemployment rate got to 13.2%, in Spain to 24% and Greece 26%. Purchase orders in businesses are decelerating and loans to the private sector to expand businesses and acquire goods have diminished in 1.1% in relation to last year. In these conditions, the possibility of growth is improbable. In reality, what appears as a dangerous possibility is deflation, the situation in which the consumer perceives that prices will diminish due to lack of demand and decides to wait until they lower even more before acquiring, and this creates the most vicious of financial feedback loops in which everyone loses because it creates a spiral of less production, less sales, more unemployment, less consumption capacity, less production, etc., and likewise towards a difficult to revert incline.

This being the situation, what is awaited is for the “unlocking” to arise from the European Central Bank’s monetary measures, imitating those taken in the United States by the FED, by the Bank of England in the United Kingdom and by Japan’s Central Bank, to wit: to put money into the economy through the acquisition of private and public bonds and through incentives to banks in order to increase and facilitate private sector loans. Mario Draghi, its president, has stated recently that the Institution is prepared to do everything necessary to overcome the risk of deflation due to insufficient inflation; especially to restore credit and adequate price increase. Meanwhile, its main interest rate was reduced to 0.05% and it instated a -0.2% rate, a true tax, to discourage banks from maintaining deposited and unproductive money in that institution.

Even though no one is sure that it is going to be done, the effect of this possible action from the ECB to go and buy bonds is already felt in the markets. Investors have been acquiring these fixed income papers. Currently, France and Germany take money on loans, that is, sell their bonds with rates of around 1% annually, and Spain and Italy, which until recently could not sell because of the excessive yield investors were asking for; acquire money loans at 2% annually.

During the month, shares rose an average of 3% in American and European Stock Exchanges, somewhat less in the Asian ones, except for Shanghai, where the increase was almost 10%, maybe encouraged by the Chinese government’s decision of “giving impulse to new engines for its progress”.

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