March payrolls were disappointing, as were the ISM business surveys and all talk of a “Great Rotation” from bonds to equities, so prevalent at the beginning of the year, has died down.
Europe remains problem number one, with earlier signs that the economic situation was stabilising proving to be a false dawn. The latest set of PMIs signal an even deeper recession than expected and illustrate the folly of trying to reduce debt levels into a contracting economy.
Peripheral economies are now subject to self-defeating austerity, making it harder to deal with the mountain of public debt, while Germany remains hostile to the domestic reflation which would ease imbalances within the Eurozone.
The advent of the ECB’s OMT stop-gap may actually have made the problem worse, by taking pressure off politicians to make the necessary reforms and move towards greater banking and fiscal union. ECB policy cannot be a solution to the underlying problem: monetary union will only work with a fiscal union, which in turn requires a degree of democratic consent that is unlikely to be forthcoming.
In the long term, either the rest of Europe must become more like Germany and support their own spending, or Germany agrees to subsidise the rest. Since neither outcome is likely, the problem will keep appearing in different guises.
