06 October 2014

Reuters: Will the European economy’s summer squalls turn into an autumn tempest?

Following the grim market response to European Central Bank President Mario Draghi’s latest monetary policy pronouncements, Europe is approaching another make-or-break moment comparable to the crisis of 2012. The summer quarter ended this week, and financial markets delivered their judgment on just how bad things are, pushing the euro down to its lowest level since September 2012. Europe’s quarterly stock market performance was the worst since the nadir of the euro crisis. The question is whether the miserable summer will give way to a milder autumn. Or whether the summer squalls will turn into a catastrophic tempest.

Given the absence of any decisive action at this week’s European Central Bank meeting, the answer will depend on three events in the month ahead: the Ukrainian elections on Oct. 26; the bank stress tests due to be finalized in late October by the central bank, and the judgment on French and Italian budget plans due to be delivered in outline by Europe’s political leaders at the Milan “growth summit” on Oct. 8 and then in detail by the European Commission at the end of the month.

To understand the significance of these events for the European economy and financial markets we must consider the causes of Europe’s summer slump. Not just the general lack of competitiveness or dynamism often blamed for Europe’s economic problems — but the specific things that went wrong since early May, when the euro peaked at 10 percent above its current dollar level and the ratio between euro zone and U.S. stock markets was 18 percent higher than it is today.

Full article on Reuters

© Reuters