The Financial Problem With Europe

Guest post by Market Authority 

Europe is struggling, and trade sanctions with Russia are making a bad situation even worse. 

Confidence in Germany (as measured by the ZEW index) plunged today to 44.3 in August from 61.8 a month ago. This was dreadful compared to the 54.0 expected by economists. 

While the plunging German stock market hinted that weak confidence number was expected, this abysmal reading was categorized as “Grim” by Pantheon Economics’ Claus Vistesen. Here’s a chart of the German ETF over the past year: 

Market Authority

As you can see, the selloff from mid-June has erased nearly all the gains in the past year. 

Yesterday, we spoke of the paradox of thrift: the idea proposed by Keynes that total savings in an economy will actually decline if everyone chooses to save at the same time. In order to earn income to save, someone else needs to spend. Your savings is someone else’s spending, and vice versa. 

This concept underlies the structural problems in Europe, where a unified currency cannot coexist with a stratified political system. While most investors dismiss Europe’s problems as originating in the social democracies of southern Europe- this could not be further from the truth. It’s a very common mistake to moralize the southern Europeans (Portugal, Italy, Greece, Spain) as “lazy, government-supported wine-drinkers relaxing on the Mediterranean”. After all, if you’ve spent time in vacation destinations along the Mediterranean, it clearly feels like a way of life. 

Market Authority