Thursday, October 9, 2014

Economy: Why I Am Still Optimistic For Europe

(Drivebycuriosity) - Europe is in a mess. Pundits and media blame the weak economy to the austerity policy (huge public spending cuts), but the US has a austerity policy too and is doing well. So what?

There are at least 3 other factors which are influencing Europe`s economy  - and they all are working positive now:

1. The Euro has been falling since early May. In the first five months of the year the European currency floated between $1.35 and $1.39. The high Euro price, in spite of the economic woes, created headwinds for Europe´s exporters. Since then the Euro dropped almost 10%. Now companies like BASF (chemistry), BMW, Daimler, L√íreal, Philips (electronics), SAP (software), Siemens (infrastructure) can offer their goods cheaper on the global markets.

2. The international price of oil, called Brent Crude, has been dropping too. In the first half of the year the Brent price oscillated around the $110 mark and peaked at $115. The high energy costs worked like a tax and reduced the amounts European consumers could spend for other goods which was reflected in the mediocre European retail sales. They also meant higher production costs for the companies. Since then Brent fell around 20%. Now cheaper energy works like a tax cut. It reduces the costs for European companies and  consumers can spend more money in the shops.

3. In September the European Central Bank started a new stimulus program (quantitative easing - through the purchase of private sector credit, including asset-backed securities and covered bonds) and added further interest rate cuts.

More monetary stimulus, a lower Euro and cheaper oil should create strong tailwinds which could rekindle the ailing economy, at least in Germany, who´s industry depends strongly on the global markets.

I believe we will soon get better news from Europe´s economic front.

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