Eurozone Still in Trouble

Eurozone

The European economy has been struggling for several years now. Doubting the effectiveness of the recent reforms and industrial rebounds, many analysts are claiming that the Eurozone is still in trouble. They remain skeptical of the latest measures taken by the European Central Bank, and fear the fallout could affect other countries as well.

The European Central Bank President Mario Draghi has provided stability and confidence via new measures such as tapering money-printing or absorbing the failing assets of various other banks. Many of the countries have put up with new challenging supply-side reforms, in order to create a leaner, more competitive Eurozone and preserve the union’s currency. However, The Telegraph states that all these measures are mostly just elaborate smoke and mirrors covering up the troubled banking sector. For example, the revival in Greek economy after six years of relentless recession and GDP reduction is most likely due to the confidence of the financial market, hoping the other countries in the union will prop it up regardless. The website also recalled a German poll in April showing that some 81 percent of the public believes the Eurozone crisis is not yet over.

However, the recent events in Ukraine are helping to bring new economies into the zone. After Russia annexed Crimea, Foreign Minister of Poland Radek Sikorski announced that the country would like to speed-up its application to join the Euro, without any additional qualms. Lithuania also followed suit, despite being previously critical of some of its Baltic neighbors rushing into a single currency. Despite the newcomers, Eurozone is still in trouble with the economy stuck in a limbo, the Telegraph further states. Most of the members would not want to return to sovereign independence, and yet are not fully fully willing to give up the power required to strengthen the currency union.

Forbes contributor Frances Coppola also expressed doubts regarding the European Central Bank’s measures. Despite the bank imposing negative interest rates on any funds deposited by other institutions, Coppola believes the effect would be contractionary, thus worsening the ongoing recession. Alen Mattich from The Wall Street Journal further cautions about the falling yields from bonds offered by the bank. He explains that in a largely accepted viewpoint, current 10-year bond yields are predictive of the market’s state over the maturity of the bond; higher yields would  indicate a stronger growth and inflation, which is not the case here. If the new Euro bonds do not start rising soon, they may repeat the situation in Japan, where falling bonds eventually led to serious deflation of the economy.

On the whole, many analysts remain concerned about the financial issues faced by the European Union. There is also a growing concern how the situation might affect the global economy. Two-fifths of the U.K.’s trade happens in the Eurozone, and the country’s industry is benefiting from the highly skilled European migration as well. The U.S. Treasury also expressed fear that the Eurozone is adding a permanent global deflationary bias, which could impair America’s own economic recovery.

Even in light of the recent industrial output rebound in April, as reported by Reuters, the crisis is not yet over. The Eurozone is still in trouble. The current measures, according to the analysts, are only indicative of the confidence and hope of the countries, and do not provide adequate long term solutions. While the situation may be seemingly better, the crisis is still far from over.

By Jakub Kasztalski

Sources
The Wall Street Journal
The Telegraph
Forbes
Reuters

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