For nearly 25 years, the European Union (EU) has held together despite challenges from bankrupt institutions, separatist movements and members with widely divergent economic prospects. But that cohesion is being tested, according to Albert Edwards, by countries that are losing their competitiveness.
Edwards is the global strategist for Societe Generale and is based in London. He spoke at a private luncheon for clients earlier this month in Boston. The slides from his presentation are available here.
“The EU is a doomsday machine for some economies,” Edwards said, “particularly Italy.”
The problem, according to Edwards, lies in the fact that countries like Italy have become economically uncompetitive due to lower productivity. As a result, their real exchange rate is rising – the prices of goods produced in those countries have become too expensive to sell abroad.
“The only way to stand still is to deflate wages,” he said. Deflating wages is a euphemism for salary cuts in order to lower production costs.
Moreover, he said dissent – something the EU does not like to deal with – will exacerbate Europe’s economic difficulties. “Young people overwhelmingly want to leave the EU because of high unemployment,” Edwards said. Spain’s economy has grown 4%, but youth unemployment is over 40%.
In Italy and Spain, demographics changes (a growing youth population) will drive further dissent, he said.
“What will happen in the next recession?” Edwards asked rhetorically.
In a broader context, Edwards said his clients don’t know what to do about the fact that global financial assets are overpriced.
One answer to that question may come from China, he said, which will be a key indicator of whether asset prices can sustain their current levels.
Volatility in all markets has been suppressed, he said, which is unsustainable, but there’s no indication of when it will end. This is the longest bull market in history and the third longest economic recovery, now into its 100th month, according to Edwards.
“Clearly we are closer to the end than the beginning,” he said. “The question is how far we are from the end.”
I’ll come back to Edwards’ concerns about China, but first let’s look at his update to his “ice age” thesis.
By Robert Huebscher, read the full article here.
