Eurosclerosis

Summary:

  • Europe’s debt crisis continues as finance ministers have postponed deciding whether Greece will receive another round of financing.
  • I think they’ll agree to another round of financing, but they’ll likely wait until the last minute.
  • The European Central Bank (ECB) should mimic the Fed and step in to purchase unlimited amounts of European sovereign debt to support the markets and the economy.

Because of high unemployment and rigid labor markets in the European nations during the 1970s, Europe was said to suffer from “eurosclerosis,” derived from the medical term “sclerosis.” The creation of the European Union and the eurozone were supposed to not only treat, but also cure eurosclerosis. However, the inability of eurozone policymakers to deal decisively with the eurozone debt problems is proving that the treatment is worse than the disease.

The most recent page in the unfolding story of Europe’s debt crisis is one where finance ministers have postponed decision on whether Greece will receive another round of financing. I think they’ll agree to another round of financing, but they’ll likely wait until the last minute. That seems to be the standard operating procedure for policymakers these days: wait, wait, and wait some more, and then, finally act.

One major issue affecting the eurozone is its structure. The 17 countries that comprise the eurozone are not what an economist would call an “optimal currency area.” Of course, neither is the U.S., but at least the U.S. system seems to work. Despite criticism of the Federal Reserve for its unorthodox actions from 2008 to the present, with its various large scale asset purchase programs (quantitative easing), the European Central Bank (ECB) should mimic the Fed and step in to purchase unlimited amounts of European sovereign debt to support the markets and the economy. The Fed’s policies were supportive of the markets without generating inflation, and the ECB’s actions could produce similar results. Jean-Claude Trichet, the current ECB president, said in August that he supports the use of unconventional monetary policy. In November, Mario Draghi will step in as the new ECB president. Perhaps that’s how he will inaugurate his presidency. 

The views expressed and any forward-looking statements are as of 10-4-11 and are those of Brian Jacobsen, chief portfolio strategist, and Wells Fargo Funds Management, LLC. Discussions of individual securities, or the markets generally, or any Wells Fargo Advantage Fund are not intended as individual recommendations. Future events or results may vary significantly from those expressed in any forward-looking statements; the views expressed are subject to change at any time in response to changing circumstances in the market. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.

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