Bridgewater: Europe Faces Greater Challenge Than the US in 2008

Prior to the G20 Summit that took place in Mexico in June this year, analysts at Ray Dalio’s Bridgewater Associates, made some key observations on how he expects the meeting to play out. The analysis was critical of the role that policy decisions made at these summits play in restoring investor confidence. Policy makers face challenges at these times when deleveraging processes are leading to risk of further slow or negative growth. The analysts of the world’s largest hedge fund, they also note that the fate of Spain was decided a few years ago, but policy makers failed to realize the signs. They still give out empty assurances and seem incapable of planning any significant changes to alleviate the dire consequences.

The European leaders still don’t have a definite Plan B when their present actions, that mostly rely on the fate of the Spainish bailout, and the ECB’s support, will fail to deliver the desired results. The current crisis in Europe differs from the 2007-08 meltdown of the US economy. The major difference is that the US had a focused and united economic interest, while opinions and interests are largely polarized in the Eurozone. Countries like France, Spain, and Italy are not ready to give up fiscal sovereignty, while Germany wants to take part in debt sharing, only when a fiscal union has been achieved. There is a lot of work to be done in Europe, if an actual fiscal and banking union is implemented. Angela Merkel did emphasize on the need for unified policies in the EU Summit that took place in late June 2012. The Brussels summit also agreed on an elaborate bailout plan for Spain.

Bridgewater also comments that the European economy is capable of stonewalling the growth in emerging markets and other developed economies. The observations are true, as China and Japan slowed in the face of the choppy European markets. The most concerned of the group are the US and China, but their ability to provide stimulus is severely strained, as they await impending elections. Dalio comments that if EM countries take part in increasing IMF funds to Europe, it should not be taken as an action purely reflective of their concern for the Euro economy. These economies are looking for a larger voting share in the global lender, and for this reason, the German Chancellor is not excited about these rescue measures. Dalio further adds,

• “Policy makers in Europe have a particularly tough road ahead, and “the challenges of the European policy makers much greater than those of American policy makers in 2008.”

Europe does now have more of a plan to deal with the situation, but Dalio notes the hardships ahead. In an interview earlier this week, he specifically mentions the tough conditions in Southern Europe which will not end any-time soon.

Source: ValueWalk

Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.