Draghinomics: Why Europe needs help fast

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Europe is weakening

Europe has more than one problem. Growth in the Eurozone stalled in the second quarter, following four quarters of sluggish recovery from a crisis over high government debt. Unemployment remains at a painful 11.5%. The region also has severely low inflation, which can dampen growth for years. Then, there’s also been a sudden decline in exports and industrial activity in Germany, the dominant Eurozone country. All these factors have heightened concerns in Europe.

Europe is weakening

Markets down

Adding to the global market turmoil, investors in the European economy worry about it falling into recession for a third time in six years. The 18-country currency union, which accounts for 17% of the world economy, seems to be looking for a clear path out of its economic troubles.

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The Stoxx 50 index of top Eurozone stocks fell as much as 6.3% last week before recovering a bit on Friday. It’s down by about 5.7% over the past three months. Exchange-traded funds such as the Vanguard FTSE Europe ETF (VGK), the iShares MSCI EMU Index Fund (EZU), the iShares MSCI Germany Index Fund (EWG), the iShares MSCI EAFE ETF (EFA), and the iShares MSCI Italy Index Fund (EWI) track European equities.

Draghinomics

The Chief of the European Central Bank, Mario Draghi, has set forth a three-part strategy to help the euro area. The plan is known as “Draghinomics.” The plan includes:ome in

  1. Monetary stimulus from the European Central Bank, or ECB
  2. Added government spending from countries that can afford it
  3. Pro-business reforms to cut bureaucracy and make economies more productive

However, Draghi, in his role as a central banker only controls the monetary pillar, while governments control the other two pillars of the economy. Draghi has stressed the importance of economic reforms in the euro area to drive recovery. Read Mario Draghi on why reform is necessary for Eurozone’s recovery for important background.

There are certain issues in the way of implementing the ECB Chief’s Draghinomics. Find out more in the next part of this series.

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