May 15, 2013 | By Scott Minerd, Global CIO
The monetary policies pursued in Japan, informally known as “Abenomics,” may indirectly save the European Union. Japan, which is a direct export competitor with Germany, has devalued the yen by approximately 30% since last September. The euro, on the other hand, is currently overvalued by roughly 20% on a purchasing power parity basis. This means German goods have become relatively more expensive and German export data has begun to slow as a result of this.
This dynamic could lead the European Central Bank to act more aggressively in devaluing the euro, which would help the periphery. Importantly, the measures could be carried out under the banner of stimulating economic growth through boosting exports in Germany and France, thereby avoiding the political backlash from the core, which is reluctant to provide help to the periphery. This development, combined with the recent announcements that the European Union is not likely to implement any further austerity measures, can be interpreted as evidence that Europe could return to modest economic growth within the next 6-12 months.
The eurozone’s economy is expected to return to growth in 2014, according to official projections. The region’s most drastic fiscal cuts have already been implemented, meaning the public sector may cease to be a drag on growth over the next few years. Additionally, the private sector should respond favorably to the cessation of government austerity, which will further propel economic recovery.
Source: EU European Economic Forecast Spring 2013, Guggenheim Investments. *Note: 2013 and 2014 are forecasted projections. Core countries include Germany and France; Periphery refers to Italy, Spain, Ireland, Greece, and Portugal.
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