The problem with Europe

News.

Feb. 4 (Bloomberg) -- Stocks and bonds fell in Spain, Portugal and eastern Europe on concern governments will struggle to fund their budget deficits as spending cuts in Greece trigger labor strikes.

Feb. 4 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said he’s confident Greece can get its budget deficit under control and signaled officials have no plans to raise their key interest rate from a record low of 1 percent.

For peripheral European countries that have spent beyond their means, it appears that there is no easy way out, no matter what choice they made about the currency(Financial Times).

My point. I have been saying for a long time that countries with low productivity cannot live in the same economic/monetary area of countries with high productivity and have the same currency.

Why? Investors avoid low productivity countries and go in high productivity countries. Historically, the low productivity countries would devalue and maintain -- artificially and for a short-time -- a resemblance of competitive advantage.

Now, these countries cannot devalue because of the common currency. The outcome is that they are economically crashed by the high productivity countries.

The same adjustments take place -- in a much minor scale than in Europe -- also in the US. Ohio or Michigan or West Virginia are at a competitive disadvantage relative to, say, North Carolina because of the policies followed in those 3 states. Life in these 3 states (weak dollar areas) is in fact less expensive than, say, New Jersey or Connecticut.

The bottom line is that countries low productivity countries like Greece, Spain, Portugal, Italy, and the UK are being "crashed" by the higher productivity countries of the EU.

This is the main reason Milton Friedman believed the EU would not survive.

George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
Ranked Top Market Timer in 2009 and 2010 by Timer Digest

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