Euro zone shudders to a halt.

This is the headline from the August 15 issue of the UK Financial Times. The
European Union has a GDP larger than the United States so its economy is a major
contributor to the world economy. The European Union economy has now reached
a critical stage and over the past year the IMF has issued several downgrades so it
seems that the European Union is moving closer to recession and/or deflation.
A recent review by John Abernathy offers three scenarios for the European Union.
Europe could very slowly return to a normal sustained recovery.
Europe could lapse into a deflationary cycle similar to Japan.
The European Union asset bubble could burst with a rapid fall in equities and
other asset prices.
Confidence within the European Union is low and the rate of recovery over the past
six years since the GFC has been extremely weak, bond yields are very low and
there is a lack of demand for credit despite very low interest rates.
Normally a financial bubble created by excessive liquidity and cheap credit would
quickly reverse with a surge in inflation but this is now not evident and unlikely. In
fact the price of financial assets is rising to inflated levels while consumer prices are
falling. So there is a distinct possibility that the European Union will fall into a
deflationary spiral exacerbated by an ageing population which is showing no growth
and this is supported by key financial indicators such as bond yields and the lack of
credit demand. Of the three possibilities noted above a collapse of the financial
bubble seems most likely.
Meanwhile the monetary policies of the ECB have created a completely artificial
situation where countries such as Italy and Spain are able to borrow funds at rates
1% below Australia which has an AAA rating. With Spain having extremely high
unemployment and Italy now in recession this artificial situation is clearly
unsustainable.
It is clear that recovery plans for the nations within the European Monetary Union
have not worked and radical change is required but it may now be too late for any
such action to be effective. While it is suggested that widespread quantitative easing
is needed, surely this will only exacerbate an already obvious asset bubble. All
things considered, it appears that the European Union is the most likely contender to
lead the world into a recession and the likely trigger for such an event is an
escalation of tension and trade sanctions with Russia.

EU with a GDP larger than the USA is a critical component of the world economy
and is set to lead the world into a recession.