European PMI Falls More Than Expected
Markets declined today after the release of European PMI and ADP data that missed expectations. Markit's Eurozone Manufacturing Purchasing Managers' Index declined in April to its lowest level since 2009. April Eurozone unemployment rose by 169,000. EURO/USD dropped from a high of 1.323 this morning to 1.315 as of 12:00pm.
Should anyone be surprised? European policy-makers seem to opine that austerity will reduce government deficits, thus putting nations in a better position to access bond markets for funding. Unfortunately, this policy prescription does not appear to be working.
According to many Keynesian macroeconomists, austerity acts to contract economies. Thus, widespread government spending cuts across Europe would lead to further economic slowdown. By slowing down economic growth, measures of austerity reduce tax revenues – creating the need for more spending cuts that reduce tax revenues even further. With protests on the rise (see Spain ), European citizens are not making self-defeating austerity any easier.
Even the German economy is experiencing negative effects of austerity, with its unemployment rising unexpectedly. Accordingly, Germany may want to reconsider its support of utilizing austerity to deleverage indebted European nations. The vicious cycle that could result from harsher austerity could lead to continued economic disappointment. Market participants may anticipate further economic deterioration in the Eurozone in the coming months.
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