Pimco's El-Erian - Don't Be Fooled By Europe's Fake Normal
This year, there is another reason why Europe has pressed the pause button for August. With a looming election in Germany, few wish to undermine Chancellor Angela Merkel’s likely victory. After all, Germany is central to Europe’s well-being, and Merkel’s steady hand has allowed the continent to overcome a series of challenges over the last few years. As a result, many are eager to postpone any controversial policy decisions rather than rock the German political boat.
Some of the recent economic news has seemed to justify this approach. At the end of July, the widely watched indicator of European manufacturing activity crossed the threshold signaling expansion for only the second time in 23 months.
Adding to the sense of comforting normality, several European officials have taken to the airwaves with optimistic pronouncements. Whereas the euro and the eurozone were “under threat just nine months ago,” European Council President Herman Van Rompuy recently declared, “this isn’t the case anymore.”
All of this has underpinned a much-welcome calm in financial markets. Sovereign interest-rate spreads have been well-behaved, the euro has strengthened, and equity markets have risen robustly.
Yet no one should be fooled. This summer’s sense of normality is neither natural nor necessarily tenable in the long term. It is the result of temporary and – if Europe is not attentive – potentially reversible factors. If officials do not return quickly to addressing economic challenges in a more comprehensive manner, the current calm may give way to renewed turmoil.
The task for Europe is not just a matter of restarting and completing the economic and political initiatives, whether regional or domestic, that have been put on hold until after the German election. In fact, these top-down decisions, while admittedly complex and certainly consequential, may be the least of Europe’s challenges.
Europe must also counter and reverse micro-level challenges that are becoming more deeply embedded in its economic and financial structure. Each day that passes complicates the design and implementation of lasting solutions to four problems in particular.
First, joblessness continues to spread. The overall unemployment rate (12%) has yet to peak, led by an alarming lack of jobs among the young (24% joblessness in the eurozone as a whole, with highs of 59% and 56% in Greece and Spain, respectively).
Second, adjustment fatigue is widespread and becoming more acute. Long-struggling European citizens – especially the long-term unemployed – have yet to gain any sustained benefit from the austerity measures to which they have been subjected. And the result is not just general disappointment and worrisome social unrest. In the last few weeks, political stability in Greece and Portugal has been threatened as governments struggle with declining credibility and a rising popular backlash.
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