Euro Area Woes Sustain U.S. Bond Prices

Recent statistics released by the OECD confirm what we have long known: Euro Area unemployment runs about twice that of the United States. Projections released by the OECD on 07-Feb-2006 show that this trend is expected to continue through 2007:

US Unemployment Compared to Europe
US Unemployment Compared to Europe

The Wall Street Journal, in an editorial on 08-Feb-2006 (”The European Disease”), citing the same OECD report, said that the rate of GDP growth per capita for Germany, France, and Italy is falling, relative to the U.S., and that Jean-Phillippe Cotis, chief economist at the OECD said that at this rate, in twenty years, the average U.S. citizen would be twice as rich as a Frenchman or German.

So, what does this have to do with the price of U.S. bonds?

Relative Misery and the U.S. Trade Deficit

As mentioned in the article, “Is the U.S. Trade Deficit Sustainable?“, countries with high unemployment and low wages, relative to the U.S., are motivated by neo-mercantilist impulses to boost exports and restrain imports, attempting to build foreign exchange reserves; and this is precisely what the Euro Area has been doing for some time.

(See: “The Trade Deficit and Dollarization“).

Most European countries run a trade surplus with the U.S., and this adds to the U.S. trade deficit and the amount of dollars held by foreigners.

(See: Flow of Funds Table F107.)

A heavy burden of socialism and trade unionism weighs upon Old Europe, keeping unemployment high, stimulating protectionism.

Now, relative economic misery in Europe encourages the building of trade surpluses, putting more dollars in the hands of foreigners who prefer fixed income securities over equities,, which boosts prices on the U.S. bond market.

(See: “Trade Deficits Have Depressed Bond Yields for 20 Years“.)


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