Euro: Part One
It’s been long awaited the economic recovery in the Euro Area. After years of political and economic struggle, light at the end of the tunnel emerges as a sign of salvation. What happened during the Euro sovereign crisis seems to many European leaders a nightmare that none of them want to talk about.
Unfortunately, signs of trouble emerge as many hidden factors appear on the surface that could shake the basis of the European Union, starting with Brexit, the continuous arrival of immigrants, and lately the appearance of non-performing loans in multiple European banks mainly in Italy and Spain.
The European Union that we know today is a political and economic project that constitutes of 28 member states which have developed a monetary union and a standardized law system which applies to all member states; it ensures the free movement of capital, labor, and goods and services. The Union dates its origins back to 1951 were after hundreds of years of bloodshed, countries which were fed up with fighting, and overwhelmed with death, debt, and slow economic growth, acknowledged that they own multiple economic advantages, if combined, will not only stop wars breakout, but also, create mutual benefits to all members of the union, spreading economic and social prosperity among them. At least that’s what they thought they can achieve back then. Fast-forward to 2010, and after the Euro Area became official, you can realize that wars have abated and prominent welfare status continued to spread through exploiting economics of scales and spread of expertise among member states. Until in 2010 trouble appeared.
In 2010, and following the 2008 Debt Crisis, Portugal, Ireland, Italy, Greece, and Spain, reported unsustainable debt levels which were unacceptable under Euro Area standards. Long story short, bailouts were made to the mentioned states by the Troika which constitutes of the ECB, IMF and European Commission, to ensure that these countries will not default on their debt obligations. These funds were released on condition that multiple fiscal reforms should be taken to ensure that the fresh funds are paid back to the creditors. This was later followed by an expansionary monetary policy directed by the ECB, in coincidence with the Federal Reserves’ tapering of its expansionary monetary policy. The European quantitative easing program was launched on January 22, 2015, were a €60 billion per month of Euro Area bonds were bought. This figure later increased to €80 billion with a total cost of €1.1 trillion. Moreover, the deposit facility rate, main refinancing operations rate, and marginal lending facility rate were cut in June 2014; they now stand at -0.4%,0%, and 0.25% respectively. These measures were implemented to facilitate investment, economic growth, and inflation. Since 2015 signs of improvement emerged. Unemployment rate which peaked in 2013 at 12%, fueled by job losses in the bailed-out country, declined to 8.8%, in October 2017. Moreover, the manufacturing PMI continue to steadily rise and stands at 60.1 in November 2017 a near record high. This is accompanied by accelerated expansion in production, new orders, and record growth in new export of goods and services. In addition, the service index increased to 57.5, the second highest level in 20 years, an indication of improvement in the services sectors.
All mentioned information indicates that the memories of 2010 are well in the past and no sign of trouble seems to ascent, or that’s what investors thought until Italian banks bailouts emerged in May 2017. What happens next? I’ll let you know in the coming month.