For all the monetary and fiscal stimulus applied to the US economy, the recovery remains a disappointment. Growth may rebound to above 3% in the second half of the year. Inflation rose to 1.5% in May. The Fed may consider easing again.
But the wealth is not trickling down. Small business account for 99% of all US companies and account for two-thirds of all hires, are selling into a weak consumer market. Banks know it, so they are withholding loans. It is a cappuccino economy: Frothy top and a static bottom.
Greece polled 87% of the public who think the country is heading in the wrong direction. But Greece’s strategy of denial – refusing that it cannot pay its debt, risks encouraging contagion in the Eurozone. There is an alternative: an orderly restructuring of Greek debt. Otherwise, the ECB risks having to deal with other troubled countries. Greece owes 300 Billion Euros, Ireland owes 150 Billion, Portugal 160 Billion, Spain owes 640 Billion, while Italian debt amounts to around 1.8 Trillion Euros. Thus a contagion could easily become a deluge.
Europe’s approach to the sovereign-debt crisis, especially for the southern and western periphery of the euro area must face facts. Hope of containment is shattered. Ireland had to be bailed out, next it was Portugal’s turn. Loss of competitiveness combined with levels of public debt that is unsustainable must be blamed. Europe’s monetary union experiment without the underpinning of a fiscal union may prove to be too audacious. Wrangling before, during, and after their summit only emphasizes the difficulty of reaching a solution. Leaders may want to buy more time, unfortunately, markets have a different timetable. It is increasingly hard to see a way out of this crisis.