Over the last few years, the word collocation “European crisis” has turned into a set expression. It’s been almost 5 years since it began. Europe seems to have suffered most of all form the global crisis. 2 years ago a new wave of crisis broke out, thereby turning into a severe debt and banking crisis in the EU and the eurozone.
Good news are scanty while bad news keep coming from Europe almost every day. Yet, the world cannot ignore it because Europe accounts for nearly 20% of the entire global economy. Even though everyone seems to get used to unexpected (sometimes shocking) and controversial news from the area, they are still worried about the destiny of the Old World? A complete downfall or a renaissance?
The Washington Post: Be Skeptics.
According to Robert Samuelson, a columnist for The Washington Post, this is the main idea of the recent report made by Hans-Werner Sinn, a German economist and President of the Ifo Institute for Economic Research.
During the prestigious conference in Washington that took place on May 1st, he told the audience about the near-term prospects of the EU, which are not that reassuring.
Hans-Werner Sinn assumes that Europe’s major problem is the fact that most debt-ridden eurozone economies lack competitiveness. This leads to a trade imbalance, which is getting increasingly bigger.
Some European donors like Germany are seeing major profits amid bigger deficits, higher unemployment and tougher austerity in risky eurozone economies. Therefore, the presence of such serious contradictions within the scope of a single economic system undermines the EU and eurozone’s stability, thereby leaving them no chance to recovery.
According to Eugene Olkhovsky, Masterforex-V Academy’s leading experts in financial markets from Canada, it seems that the only cure for the disease is to restore the competitiveness of risky debt-ridden European economies. Theoretically, there are 3 ways to reach the goal:
1. Austerity. Further austerity may eventually bring results but this is a quite a long and hard way to recovery.
2. Germany may sacrifice itself, i.e. it may abandon its pricing advantage and agree to a higher rate of inflation. The current rate of inflation in Germany is around 1% a year while the rate of unemployment is 5,4%, for comparison sake, the average rate of unemployment in the eurozone is over 12%. If Germany agrees to an inflation increase up to 5,5% a year, this may eventually help risky eurozone economies to get out of the debt abyss through getting their competitiveness restored.
As far as the European currency is concerned, any further development in the market of EURUSD will e determined by the ECB and the Fed, i.e. which one of them will be the first to continue their QE programs.
The chart below, courtesy of Masterforex-V Academy, reflects the current state of affairs in the market of EURUSD:
3. Temporary exit from the eurozone. Obviously, this holds true for risky eurozone economies only. They may be allowed to go back to their old currencies in order to cure their economies. Once they restore their competitiveness, they may be allowed to re-enter the eurozone. Obviously, such a scenario implies defaults since most debts, bank deposits, payment and business agreements will be denominated in national currencies.
Still, the German expert doesn’t believe in any of these 3 scenarios. However, he hopes that the European community will finally manage to come up with a new strategy based on all the 3 variants.
