Markets & Economy
Time for optimism in Europe?
April 21, 2014
Catherine Gordon: We recently asked Vanguard's chief economist in Europe, Peter Westaway, if there are reasons for increased optimism for the European economies. Here's what he had to say.
Peter Westaway: Well, I think we can certainly be more optimistic than we were a year or so ago, when there was really a time when it looked as if the whole euro area might unravel and the euro itself would break up. I think that terror risk, while not completely absent, is pretty much gone. People aren't worrying about that so much anymore, but that's not to say that all of the previous problems that were there are completely behind us.
So growth is now in positive territory, even for some of those peripheral economies that were really in trouble. But if you look at the level of activity in Europe, it's still not yet got back to the level that we were at before the financial crisis. So that means there's still what people call an output gap. There's still spare capacity.
If we look at borrowing by governments, certainly deficits are now rather lower than they were before, but the level of debt relative to the size of these countries is still too large. It's going to take a long time before debt gets back to what you might think of as sustainable levels. Some of the structural reforms that are needed in some parts of Europe, especially in the periphery, very stuttering progress has been made making labor markers more flexible and so on. But we're still a long way from turning Europe into the sort of well-functioning economy it needs to be.
And then finally, I guess the banking system is still a huge area of concern. I mean in many ways, that was at the heart of the financial crisis. It caused excess spending in a number of countries. And so what's gradually happening is that policymakers are working to try and make banks safer. They're trying to work off some of the bad debt that is sitting on the banks' balance sheets, and they're working toward what we want to see, which is some sort of European banking union, but we're not there yet. And while we're on that path to recovery, there's still risk that things could sort of flip back to where we were before. So we're getting there, but we're not there yet.
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A quick look at Europe's prospects with Chief European Economist Peter Westaway
After enduring two recessions in recent years, Europe may be ready to resume growing. Chief European Economist Peter Westaway, Ph.D., gives his thoughts on Europe's prospects for the rest of 2014.
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- How to manage "country risk"
- All investing is subject to risk, including the possible loss of the money you invest.