Europe's Crisis Isn't Over

04/01/2010 12:00 pm EST

Focus: MARKETS

Jon Markman

Editor, Trader's Advantage

Jon Markman, contributor to MSN Money, says the European Union is in a deep crisis caused by profligate overspending, and it won’t recover soon.

One veteran analyst of the European financial system, Ambrose Evans-Pritchard, the longtime international-business editor of the Telegraph, warn investors to beware of any outbreaks of optimism.

"We are in a 21st-century depression, which is just like the 1930s, except with a bigger welfare cushion," he said this week in an interview from his home in London. "It's taken a long time to get here, and it'll take a long time to get out."

European governments have spent hundreds of billions of dollars in fiscal and monetary stimuli, much like the United States and China have, yet have far less to show for it. Most analysts foresee zero growth or worse for the euro zone in 2010, and virtually every measure of economic health is now running in reverse after having briefly brightened late last year. Bank loans are declining, money growth is way down, [and] the euro and pound sterling have plunged.

Why has Europe failed to recover from the 2008 credit collapse? Evans-Pritchard says after the war, France wanted to punish Germany by destroying its industrial might and reverting it to a pastoral state. But the US took a broader view. Together with Secretary of State George Marshall, President Harry S. Truman devised a program to rebuild parts of Europe, including Germany, as a bulwark against communism.

The new German leadership led a humiliated population with a lot to prove, and together their thrift, genius, and hard work generated enough savings to create the Continent's most admired economic system. A stridently apolitical central financial authority called the Bundesbank stood at the center of the recovery, and its deutsche mark became the most credible currency in the world after the dollar.

[Meanwhile,] French, Italian, and other West European governments increasingly created high-tax socialist states under the influence of powerful labor unions. Over time, profitable, hard-nosed German companies came to dominate the Continent.

In part to blunt Germany's newfound strength, the concept of a full-blown economic community emerged. Evans-Pritchard argues that the European Union, governed by a parliament that meets in Brussels, has always been a sham because it lacks taxation, military power, and a single language. [So,] technocrats managed to persuade the member nations to create a single currency, the euro.

Once EU co-founder Belgium was allowed to join the euro zone despite government debt well in excess of the criteria, the idealistic politicians who ran the union [turned] a blind eye on Greece, Spain, Portugal, Ireland, and Italy. So, the EU is [now] up against the wall.

"Governments are stretched to the limits, and the inability to pay off these debts threatens to undermine the sovereignty of states," Evans-Pritchard said.

"Governments have shot all their bullets. They used all their powder. There's nothing left," he concludes. "Now, money supply is contracting, credit is contracting, and the velocity of activity has collapsed. This is a major new phase of the crisis."

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