The U. S. economy has so far shown remarkable resilience in the face of several roadblocks year. It has shrugged off the threat of wars in Ukraine and the Middle East, has ignored the tapering of QE, and has been generally unfazed by every other obstacle in its path, whether real or imagined. Now, however, another threat looms in the horizon and poses a much bigger threat than previous challenges.
Europe’s economic slowdown has weighed on the global economic outlook all year. More recently it looks like several countries in the euro zone may even be headed into deflation. Investors worry that deflation in Europe could spill over onto U. S. shores and ruin what has been an impressive recovery up until now.
One reason for Europe’s lagging performance is the size and scope of its welfare state. Economist Ed Yardeni observes that in Europe, ‘There are too many government regulations and regulators, and not enough startups and entrepreneurs. Labor markets remain too rigid.’ He also points out that Europe’s bankers aren’t lending, while capital markets remain ‘relatively limited’ sources of capital. The region is also highly dependent on Russian gas, and, unlike the U. S. has made no effort at developing domestic sources of energy.
While credit is plentiful in the U. S., it remains much tighter in the euro zone. According to Yardeni, over the past 12 months through May, short-term business credit rose to a record-high $2.0 trillion in mid-August in the U. S. In the euro zone by contrast, bank credit is down 2.2% over the past 12 months through June.
This post was published at GoldSeek on 10 September 2014.
Follow on Twitter
Recent Comments