Economists are looking at the situation that has besieged Europe, namely the European debt crisis, and mulling over whether there is actually a possibility of the European region being hit hard by its financial woes. At least the U.S. has the comfort of a stimulus being implemented, nor a round of quantitative easing to fall back upon. With those two luxuries being effectively taken away from the European zone, Europe might turn to other creature comforts, but where are they to be found? There are other disadvantages to be wary of too; the recovery of these nations from a protracted slump is probable, if difficult to foresee. The ditch is deep, and a lot of digging is to be done if they have to get out of the rut.
There is a wave of austerity that has swept across the European region, and in large part it can be attributed to the European debt crisis. What it means is that public and private spending has been scaled back significantly while taxes have been raised across the board, a move that is bound to have rankled and caused quite some consternation in quite some quarters. The recovery, such as it is, is still in a nascent stage and the measures that have been implemented might really slow things down further. Private demand remains a bit turgid, and life needs to be injected into that.
At times like this, some of the most eminent minds of our generation (such as Paul Krugman) have argued rather vociferously that there is a need to increase the stimulus measures that have been implemented rather than scaling it back in a slightly cowardly fashion. Make no mistake, it is a cowardly decision. Entirely pragmatic, but cowardly. Think about it for a nanosecond. Private demand is already huffing and puffing and is found wanting on a lot of counts, so to compensate (logically) you must try and up public demand. Instead, the measures that have been put in place will effectively cut back public demand. This only increases the chance of a dangerous and deflationary spiral being entered into.
The most common thing that most countries have embarked upon is to pursue an export-driven policy. As many economies struggle to bounce back from this financial rut, exports seem to be the way to go for everyone and many nations, such as the United States, are pursing this rather vigorously. And the United States by itself is very likely to succeed in achieving its aims since quantitative easing (as recently announced by the Federal Reserve) will end up devaluing the dollar and helping prop up the American economy, if only for now. In addition, President Obama’s visit to nations such as India and tie-ups with these nations will only end up giving a further shot in the arm to the argument for exports.
But European countries have no such succor to fall back upon. In the light of recent events, the European debt crisis means that the European Central Bank is the only major bank not to have pursued a policy of devaluing its currency in order to boost its own currency. The rally of the Euro in itself is not a reflection of confidence in the currency, rather it is an entirely natural turn of events given that other currencies have been devalued. The healing process is on for the world, but it seems Europe is a bit late in coming to the party. It could mean that the European zone gets marginalized (albeit for now) in the global scheme of things.