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By HaleStewart December 30, 2014 7:56 am
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Potential 2015 Flashpoint #2: The EU

     Yesterday, we learned that Greece will have to hold a new election at the end of January because their current president couldn’t win a large enough percentage of the vote.  Compounding the potential problem is the political opposition is against the austerity rules imposed on Greece by the lenders.  This situation was eerily similar in effect to the Greek situation for several years ago, when the potential for a Greek exit from the EU region sent shudders through financial markets.  Regardless of what actually happens, this situation reminds us that Europe is not only (and still) an economic basket case but there is little reason to see any major policy initiative that will help to solve the problem.

     Let’s start with the basic problem faced by the region:

Since the second quarter of 2013, the EU region has grown between .1% and .3% on a quarterly basis for an annualized growth rate between .4% and 1%.  This weak growth has done nothing to help alleviate the sky-high unemployment rate, which has stood at 11.5% since the beginning of the summer:

     And this low rate of growth is also contributing to a potential episode of deflation:

In the last two years, inflation has moved from over 2% to just barely positive.  And, the latest round of oil price decreases will contribute to this situation.

     Other parts of the economy are just as weak.  Consider, for example, both the service and manufacturing PMIs

The services PMI registered a 54 level as recently as mid-summer.  But that number has been decreasing since, now standing around 52.  And the manufacturing PMI has been just barely positive for the last 5 months.

     And while retail sales have been growing, they are weak, registering readings between 1% and 2% YOY growth over the last year.

     But the real issue is there is no political will to solve the problem.  The EU region has been limping along for the last 12-18 months.  All the major participants know there are major issues to deal with.  In addition, everyone sees the lack of growth.  No one, however, is willing to do anything about it.  The ECB announced they would consider QE a few meetings ago, but they have yet to pull the trigger on any type of meaningful buying program.  France and Italy have tried to push back on those that promote austerity, but that battle has stalled.  This lack of overall political will to do anything about this situation is the real problem facing the region.  And, nobody is emerging who is willing to take up the cause.  

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer







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