What is Going on in Europe??

The US$/Euro exchange rate briefly touched 1.1980 Friday, a few pennies from the original rate set 1/1/99 of 1.1674. The European Union, with a population of 457 million actually lags the US [pop 295 million] in total GDP with a per-capita GDP of approximately $25 thousand vs. $39 thousand, respectively.

Economic growth in Europe has been dismal and it doesn't look likely that it will improve.

High oil costs are jeopardizing Europe's chances of a recovery in the second half of the year by squeezing corporate profits and leaving consumers with less to spend. Growth in the euro bloc will lag that in the U.S. for the 13th year in 14, according to the commission the European Union's executive arm.

The commission, which releases annual growth forecasts in April and October, on April 4 said growth in the 12-nation euro bloc would slow to 1.6 percent this year, less than the 2 percent predicted in October and down from 2004's rate of 2 percent. Almunia said on June 10 he was ``downbeat'' about the growth outlook for this year.

Europe is dealing with the potential for stagflation as the currency weakens and oil prices rise. As I have talked about in previous posts, energy consumption as a percent of GDP is lower in Europe than in most countries around the world, on average. In fact, in Germany and France, energy consumption per unit of GDp looks to be about half of the US's [I finally found the source of the data here]. So it won't have a huge impact, but due to embedded inefficiencies in the deployment of labor and capital, relative living standards look to be stagnating or resuming their declines.

Particularly troublesome is the situation developing in Italy, Europe's 4th largest economy. National debt of US$1.7 trillion exceeds the $1.6 trillion GDP limiting the country's ability to pay it back. Therefore, Italy has lofted the trial balloon of delinking from the Euro in what would prove to be a disastrous situation for both Italy and the Euro block.

quitting the euro would give Italy a one-time boost, though the longer-term implications for the country's economy would be less certain. It would allow the nation to repay its debts in a devalued currency -- the new Lira would quickly plummet in value against the euro -- though at the interest rates prevailing in the euro region.

Europe really has gotten lost in the economic sauce and does not adjust readily enough with changing times. The European Union was designed to clean some of that up by eliminating the ability of nations to protect or coddle inefficient industries for the benefit of the few to the detriment of many. But this is taking an excrutiatingly big amount of time.

The way that they choose to live their lives is their choice but they are doing the rest of the world a great disservice by not efficiently and effectively using the people resources to their best uses. Europe has become a political culture not an economic one and are risking their influence in the world.