As readers of the KCS Blog know, we have been and remain negative on the Euro-zone for a variety of reasons, but specifically because the Euro is a failed model. Without the ability of the Euro-zone constituents to devalue their currency when needed, and they can’t because it isn’t a Fiat currency, these economies / countries will continue to stagger.
Here is some perspective brought to us by Mark Grant:
“Let us peer specifically at Europe. Real inflation in Europe, adjusted for
austerity taxes, has been running at -1.5% for the past five months according to
London’s Telegraph. They are experiencing a very real bout of Deflation. Prices
are down -5.6% in Italy, -4.7% in Spain, -4.0% in Portugal and even -2.0% in
Holland. According to Bloomberg the EU is missing its Inflation target by more
than 150 bps on the downside. Bank of America has opined that the current
stagflation could cause a rise in France’s official debt to GDP to 105%, 148% in
Italy and 118% in Spain. The ECB has said that it is discussing some type of
Quantitative Easing though what it might be has yet to be seen. Yields are down
across Europe but the economies are no better.”
As we’ve discussed, austerity hasn’t worked. Debt to GDP is rising in most Euro-zone countries, employment remains incredibly high, and growth and inflation are non-existent. Clearly this isn’t a great formula for success.
Only time will tell, but don’t be shocked if one or more constituents are no longer sharing the Euro in the next 2-3 years.