Monday, July 28, 2008

Prospects for Euro Economy

According the the Economist Big Mac index, the Euro is 50% overvalued compared to the US dollar on purchasing power parity. There are increasing concerns that the Euro economy is heading towards recession.

Although, the Euro economy is less affected by the global credit crunch, there are still many factors contributing to a deteriorating economy.
  1. High value of Euro, making it difficult for Euro Exporters, espcially in Germany and France.
  2. Housing Boom and Busts. With most attention focused on the US housing market, not many know that European house prices, in many countries have increased much more than US house prices. For example, French house prices have increased 140% since 1999 (only 80% increase in US). In Spain and Ireland, the housing bust is more pronounced leading to a loss of jobs in the construction sector. (overvalued housing markets)
  3. Slowdown in export partners. The UK and US economies are slowing down reducing demand for Euro exports.
  4. Rising Oil prices. Most euro economies are net oil importers. Rising prices are squeezing living standards and reducing spending power.
  5. Inflation and Higher interest rates. Rising cost push inflation has caused the hawkish ECB to increase interest rates (currently 4.25%) this has further reduced demand and spending
  6. Signs of rising unemployment and decreasing output.

Prospects for Euro

The Euro has been strengthened as investors look for an alternative to the dollar. (Dollar as reserve currency) But, with the EU economy facing recession, the Euro looks painfully overvalued. I would suggest this is a good time to sell the Euro

1 comment:

Dov Henis said...

Real And Virtual Energy, And Keynesian Salvation Prospects

A. From an earlier post:

In the present return to Keynesian steering out of the catastrophic world economy crisis the government is called to stimulate demand through fiscal measures, to effect a balancing act, 'creating' just enough money to cover a 'natural' amount of economic activity, without gliding either towards inflation or unemployment.

This is, in effect, assigning to money and credit in the economy the functional attributes of energy in life's evolution.

However whereas energy, life's and evolution's monetized currency, the capacity of acting or being active, is real, money and credit are virtual reality. Their functionality depends on the image-environment experienced through human sensory-imagination stimuli. This smacks of psychology or faith-religion.

So what are the odds that a Keynesian course will steady the rocking boat? The odds are like odds of other things that depend on human reactions-attitudes. This steadying course will be as effective as the conformation of the 'people' with the 'hopeful' reactions-attitudes on which the
Keynesian assumption is based.

B. Odds of economy's salvation via Keynesian prospects

- Economy's salvation via Keynesian prospects depends on the "people's" reactions-attitudes to sensory-imagination stimuli effected in them by their societal environment.

- The stimuli thus effected depend, in turn, on the cultural constitution of the "people".

- It is difficult, very difficult, to modify human culture by decree or even by revolution. Human culture changes normally by evolution, a slower, more basic, process than by decree or revolution or even - as exposed in the present world economy - than by reaction to a catastrophe. The evidence of this is all around us nowadays in the world stock markets, and in the lobbyings of inflated-bubbled-businesses for public help lest the "people" are hurt by recession due to the collapse of the bubbles.

The present tone of the world's culture, and even ethics, including the banners of a variety of types and shades of greed, has been set by the 20th century Technology Culture. Its essence is the legitimacy and admiration of gaining capital via virtual activities, activities without or beyond production of real assets, real life resources.

So the odds of the economy's salvation via Keynesian prospects are, in the long run, proportional to the odds that the culture of Earth's humanity will evolve towards ever more rational self-organization...which is, how unsurprisingly rational, the odds of every organism to survive...

Dov Henis
(A DH Comment From The 22nd Century)