Tuesday, October 9, 2012

Austerity and Transatlantic Divergence

Cullen Roche makes an interesting point in a Seeking Alpha post, « Europe Vs. U.S. Economic Divergence Continues ». 
Excerpt :
“I said (earlier) the primary cause of this divergence was vastly differing economic approaches. Europe has implemented harsh austerity while the USA has implemented a persistent stimulative policy approach led by high government budget deficits. (…)
The result of these diverging policy approaches has been the continued decoupling of the U.S. and European economies.”
And he reproduces a recent Moody’s note that presents the divergence, in visual form, of the Purchasing Managers’ Index (PMI) on both sides of the Atlantic. The PMI is a composite index of five "sub-indicators", which are extracted through surveys to more than 400 purchasing managers from around the country, chosen for their geographic and industry diversification benefits.

The five sub-indexes are given a weighting, as follows:
  Production level (.25)
  New orders (from customers) (.30)
  Supplier deliveries - (are they coming faster or slower?) (.15)
  Inventories (.10)
  Employment level (.20)

Here is the graph:

My comment: this is compatible with the recent and continued strength of the euro vis-à-vis the dollar, due to the lax monetary policy in the U.S. and relatively restrictive one on this side, at least as long as Mr. Draghi’s promises remain that, promises.

His conclusion:  “Unfortunately, there are few signs that policymakers have learned their lesson yet …”

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