Euro Macroeconomics Post Bailout
When you watch the news headlines proclaiming yet another debt crisis in yet another European country, you inevitably wonder how this will affect Europe in the long run. Will the EU ever return to its former self or will the debt crisis change it forever?
A few days ago Angela Merkel, the German Chancellor, declared, “This debt crisis will not simply go away”, adding, “It will certainly be a decade before we are in a better position”.
She also warned that Europe faces being crippled by debt for at least the next ten years, with dire consequences for its 500 million inhabitants, including Britons.
At the same time, economic experts predicted that the debt crisis would set back Britain’s economy by six years.
Effect on the Individual
What we are likely to see during the next decade is continued austerity measures by European governments in order to keep public spending at bay and repay their huge debts.
This inevitably means reduced public spending on infrastructure, social projects, health and probably the military. For the individual it will mean a decade of, if not decline, then at least stagnation in public services. Social pensions will most likely not increase in line with the cost of living and the quality of government services may not live up to expectations.
Credit will remain hard to come by as banks lick their wounds after suffering huge losses. Individuals will find it harder than ever to buy a home of their own or even a new car.
In a sense, we will therefore see a reversal of the situation that caused the problem in the first place. Instead of a spending bubble, we will see a contraction in spending, which will in turn have a negative effect on economic activity and job creation.
We can expect property prices to further stagnate or even decline during the next few years. In the UK we are already experiencing the emergence of what some refer to as ‘generation rent’, an entire generation of people unable to afford their own homes.
The rental industry will consequently experience continued growth in demand, with rent increases virtually inevitable. Even if it becomes cheaper to rent a home than to buy one, it will not help most people, since they will not qualify for a mortgage to begin with.
The harsh austerity measures imposed by some European governments will most likely continue to create political instability, especially because many of the people who will be carrying the brunt of these measures played no role in creating the crisis in the first place; civil servants, the elderly, the unemployed.
The increased austerity measures to come will no doubt have an effect on the prices of shares, commodities and currencies. Since low levels of economic activity result in lower profits we cannot realistically look forward to a period of high share prices. This, however, does not rule out short-term price ‘booms’ caused by speculation and overreaction to even the slightest hint of positive news to reach the market.
The Euro will most likely remain depressed. A picture is worth a thousand words they say, and Fig. 11.23(a) tells its own story. This is a weekly chart of the Euro against the Yen for the past two and a half years. The long-term decline is obvious to see at a glance. Right now the price is below the Ichimoku cloud, both the blue Kijun Sen and red Tenkan Sen lines are below the cloud, and the green Chinkou Span line is much less than the price of 26 periods ago, this confirms that we are in the middle of a bear phase, with no end in sight.