Wednesday, April 17, 2013

Dreams of European Recovery Fade

As recently as a few months ago, Mario Draghi was hailed as the economic savior of Europe.  It had something to do with "bold action" and instilling "confidence."  It had more to do with printing presses and "lender of last resort."

Now, as reality sets in, forecasts of European growth are being cut as the forecasting wizards of the IMF met at their latest confab.  Today, the Wall Street Journal quotes Germany's top central banker, Jens Weidmann,
"Germany's top central banker warned that Europe's debt crisis will take as much as a decade to overcome, dismissing the view expressed by some political leaders that the worst of the crisis is over."
Later in a question and answer period, Weidmann says,
" In that sense the calm that we are currently seeing might be treacherous and my concerns relate to reforms both at the national and at the European level. I’ve gone out of my way to say that in my view—and in contrast to many declarations we’ve heard in the recent past—the crisis is not over. It is erroneous and dangerous to believe that the crisis can be solved in a year’s time. Overcoming the crisis and the crisis effects will remain a challenge over the next decade."
Without addressing labor market reforms, restoring European competitiveness particularly of France and Italy will be a fruitless pursuit.  I would disagree with Herr Weidmann when he opines the strength of the euro is an endorsement of economic fundamentals.

I would use Bill Gross' metaphor as being apt.  The U.S. economy, and the dollar, in time of risk and uncertainty is the "cleanest dirty shirt."  With the recent moves of Bank of Japan and concerns about spillovers from the Korean peninsula, investors who can't go "all in" on the dollar find the euro appealing, particularly with the ECB backstopping.  So, the euro is the "least dirty, dirty shirt" among non-dollar currencies.

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