European Economy Remains Challenged Despite Positive Growth Signs in the US

The European economy faces significant challenges despite recent positive growth signs in the US. According to Jacques Callioux, Chief European Economist at the Royal Bank of Scotland, the policy response to the crisis is still falling short, and contagion rates remain high. The market is pricing in a high probability of restructuring, and the timing of this event will be crucial in determining the outcome.

Key Takeaways:

• The European economy is facing significant challenges, with contagion rates remaining high and funding issues expected to persist.
• The policy response to the crisis is still falling short, with only two-thirds of measures targeting savings and one-third oriented towards increased taxation.
• Structural reforms are necessary to increase potential growth, but this will take years to implement, and the timing is inconsistent with the availability of funding from official lenders.
• The market is pricing in a high probability of restructuring, with the May 16th and 17th dates being critical in determining the outcome.
• Burden sharing with the private sector is a topic of debate, with official statements denying any plans to impose losses on senior creditors.
• The Southern European economies are at risk of damage from holding off new investment due to the uncertainty surrounding the crisis and the lack of allocation of private capital in the past decade.

Statistics:

• Two-thirds of policy measures target savings, while one-third is oriented towards increased taxation.
• The market is pricing in a 60% probability of restructuring in the short term.
• The Southern European economies have experienced a misallocation of private capital in the past decade, particularly in construction investment.
• The cost of supporting the housing market in these economies is significant, and it will take years to absorb the overhang of investment.

Sources:

• Jacques Callioux, Chief European Economist, Royal Bank of Scotland
• Bloomberg, "The U.S. jobs report swing"