The European debt crisis is over?
No, the European debt crisis is still raging.
Recent unrest in Spain and disinflation (declining rate of inflation) across the Eurozone remind us that all is not well in Europe.
Deflationary pressures are of particular concern to central planners like Mario Draghi, head of the European Central Bank (ECB), who are working to resolve Europe’s predicament.
Ever since Draghi’s famous “whatever it takes” speech in 2012, European financial markets have calmed down like SeaWorld whales pumped full of Valium and Xanax.
Spanish five-year government bonds now yield less than five-year U.S. Treasuries. I repeat… Spain’s government can raise funds at a cheaper rate than the U.S. government.
Remember, those Spanish bonds yielded above 7% at the height of the crisis. Widespread sovereign defaults and the potential fracture of the European Monetary Union (euro currency) were the big fears at the time.
Now, investors consider peripheral Eurozone sovereign debt to be effectively backstopped by Germany, the Bundesbank and the European Central Bank (ECB).
The central planners intervened and saved the day. Hooray!
So, all is better now, right? Hardly.
By failing to let the markets properly resolve the problem, which basically amounts to unsurmountable debt overhangs in many countries, central planners have actually ensured stagnation.
During the ECB’s most recent press conference, Draghi noted, “My biggest fear, is actually, to some extent… [nervous chuckle] a reality. And that is the protracted stagnation longer than we have in our baseline scenario…”
Draghi goes on to say, “With levels of unemployment, even though they have stabilized and we see marginal improvements here and there, they are very high. And the longer they persist, the more likely they become structural.”
Draghi even said quantitative easing had been discussed, as well as other measures, to combat deflation.
It sounds like the ECB is warming up to the Japanese model of perpetual stimulation.
Ironically, Japan, which has battled deflation for decades, is now finally starting to produce inflation. However, Shinzo Abe, Japan’s Prime Minister, and the Bank of Japan have been unable to centrally plan an increase in wage growth.
It’s fantasy to think that policymakers would do anything that would cause short-term financial market pain, but ultimately benefit citizens in the long term.
So, don’t worry. Central planners will continue to centrally plan, and whip these economies into shape…
The floggings will continue until moral improves.