Eurozone decline

On my recent visit to Europe, I had observed something that was unprecended. Something similar to what I had seen in Australia in the late 90s and early 2000s. During my past visits to Europe, I had observed that all things at boutiques and super-markets were horrendously expensive on a dollar-on-dollar basis, compared to the rest of the world. But, most of the articles were manufactured somewhere in the Eurozone, and things had just started flowing in from Eastern Europe. Chinese goods were few and far in between.

Things have turned topsy-turvy since then. The prices remain as high as ever. The supply side is the shocker, though. The percentage of Chinese-made goods has increased dramatically. This is shocking, because, I found the same cheap goods that we find in other parts of the world, strewn all over the pavement shops, as well as supermarkets, in Europe, and to me, that goes against the grain of the classical European psyche of a quality-consicous population. Even more shocking is the amount of fake goods being peddled on the pavements and pavement shops, much to the detriment of the branded goods companies.

To me, Europe may be undergoing what the USA underwent starting the end-70s – compromise on quality and focus on cost management. Who does that approach benefit in general? The “entrepreneurs” in Europe, of course. They are able to source goods a fraction of what they used to pay for earlier, and still maintain the same price points – meaning bountiful profits in the short term. The Chinese manufacturers are, of course, happy with the copius exports that will keep their factories humming.

What are the ramifications in the long run, of this trend, apart from the apparent compromise in quality of goods? Firstly, local manufacturing will suffer significantly lower outputs, and even large scale closures. However, many of the EU countries have a solcialist fabric, and firing workers or closing down factories is not as easy as in the USA. This would precipitate a crisis with the European business owners, who will face a double-whammy of falling output and high fixed costs with no flexibility. They may eventually lobby and get the Governments to absorb this unreasonable cost of doing business. But then, who ultimately bears the cost of all this? The poor tax payer, who already pays upwards of 50% at peak income tax rates, in many EU countries.

Secondly, if the Govt blinks, and allows retrenchments ( which in any case wont be easy), then job losses will mean purchasing power of the people will come down significantly, like what is happening in the USA today.

In short, this is likely to lead Europe to a USA-like situation, in the future. As of now, job losses are not as significant as they are in the USA ( with the possible exception of Germany), but for how long can the hold off?

To me, this puts the question of the Euro Zone in future, as an economic bloc.