Europe: The Big Patient

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5 min

Before 2 and half years Jamie Dimon the chief executive officer of JPMorgan Chase said that Europe will be dragging for at least a decade and his statement was proven totally right. Europe’s big advantage, but simultaneously big disadvantage is its diversity and also its biggest disadvantages are the structure of European Union and Eurozone. In the following paragraphs follows an extensive analysis of the big problems and weaknesses of Europe that have contributed to the permanent stagnation of the economies that compose of it.
One of biggest problems of Europe is its aging workforce, which is the second more aged in the world after Japan’s workforce. The consequences of this parameter is lower growth and lower pensions, because the size of labor force does not increase, which has as a repercussion lower retirements benefits for retirees, lower tax revenues for governments and lower consumer spending.
The banking sector of south countries of Eurozone is deeply problematic. The amount of bad loans approaches the number of 900 billion Euros ,the banking sectors of Greece and Italy have negative return on equity, the deferred tax assets in balance sheets of Greek banks are 55% of their total assets and Greek banks are still supported from the emergency liquidity assistance mechanism of European central bank and the growth prospects of Italy and Greece  are very low, because these countries have the highest debt to gross domestic product ratios  in Europe and also the most aging workforces and finally Deutsche bank has exposure in derivatives almost 20 times German’s gross domestic product.
Germany’s current account balance and trade balance surpluses are huge, which reveals a big fiscal imbalance and is the main cause for the higher value of Euro in comparison to US dollar and it is not irrelevant the fact that international monetary fund presses Germany to increase its capital expenditures for to be reduced this big fiscal imbalance. With this behavior, Germany wins big benefits as lower borrowing costs, higher exports gains and finally its dominance in Europe and the ability to impose its will and all other to obey because they do not have other alternative.
South countries of Europe and Eurozone suffer from high levels of unemployment and low productivity. The main causes of these phenomena are firstly the very high levels of debt that these countries have to service, the low level of fixed capital investments, and the low level of foreign direct investments and the low level of investment in high quality education and in technology. As a consequence of these data Europe is stuck in low growth prospects, low inflation and lower competiveness, but the bigger obstacle that prevents from coming investments in south countries is the high tax corporate rates and the missing of fixed capital expenditures from domestic entrepreneurs, which would create a positive signal for foreigners to invest.
Greece crisis
The manufacturing indexes of Eurozone’s countries are in a declining trend the last 4 months and specifically Italian manufacturing index is very close to the 50 points level, which means that there is a high probability of contraction in Italian manufacturing production the next months and this time European equities markets will respond very badly, because the current Italian government has declared that it is not going to implement hard reforms in the case of a downturn. Also, Italian government bond yields have risen the last 6 months 78% from their lows, which is a sign that investors are very anxious.
The era of increasing money supply and quantitative easing has been decided to stop in December of this year and that means lower growth prospects in Eurozone area, higher yields in the government bonds of south countries and lower effective demand because of the decreasing wealth effect. Furthermore, the exposure of south Eurozone’s countries in European central bank is huge and if in the meantime bursts a crisis European central bank does not have the necessary ammunition to respond.
The financial resources of the most corporations in Europe come from the banking system and not from crowd funding and that means that the corporations are exposed in banking crises and bond market bubbles, which decreases their competiveness, the real unemployment rate U6 is 18%, which indicates low effective demand in Europe’s economies and lastly Europe is thirsty for energy and must import the energy resources that it needs and be exposed in energy prices fluctuations.
refugees crisis
Finally, the biggest problem of Europe totally is the rise of nationalism because of the continuously increasing immigration flows of refugees and citizens of third world countries in Europe’s countries borders, which causes hard reactions from Europe’s citizens, high expenses for the hospitality and medical care of immigrants and social unrest and conflicts  in the interior of Europe countries between the countries’ citizens and their governors and this is the main cause of the exit of Britain from European Union and secondly the fact that British government was obligated before its departure to contribute the one third of the European total budget. This problem is even more severe from the debt and economic problem and can kill the European Union.
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