European Economy Update

I haven't written lately about Europe. The news isn't good. While the European Central Bank has recently taken useful measures to ease the crisis, the political leadership is doing the opposite - seeking more austerity.

Are there no wise leaders in Europe? Apparently not.

If debt is the problem, it doesn't help people repay that debt when unemployment rises. In Spain, unemployment is close to 25% - for young people, it is 50%. By the way, before the economic crisis, Spain's budget surplus was greater than Germany's. The problem has been private, not public debt.

The whole problem in Europe, it has become clear, is caused by fixed exchange rate (inherent consequence of the Euro) and intellectual rigidity. The continent could easily descend into a new recession/depression. Economist Nouriel Roubini explains:

"The trouble is that the eurozone has an austerity strategy but no growth strategy. And, without that, all it has is a recession strategy that makes austerity and reform self-defeating, because, if output continues to contract, deficit and debt ratios will continue to rise to unsustainable levels. Moreover, the social and political backlash eventually will become overwhelming."

The US could easily avoid a similar fate by a robust fiscal stimulus, except one of our major political parties has effectively halted any effort by the administration to improve the economy. The only thing we have going for us is the Fed and its monetary measures, including quantitative easing. So far it seems to be working, but much too slowly.