ZERVOS: Unpopular EU Economic Reforms Could Actually Cause 'Another Massive Bull Run'

David Zervos

Photo: Bloomberg TV

We’ve heard lots of prominent European economists belittling austerity recently and its troubling effects on the economies of troubled countries in peripheral Europe.Jefferies economist David Zervos argues just the opposite in an investor note out today, saying that these reforms are indeed the medicine that could make these countries hugely competitive in the future.

In fact, the prognosis for these economies is much healthier if they don’t take the easy route of inflation and devaluation.

Southern European government officials have mandated wage rates that are too high. Those with a job will fight aggressively to keep them, and those without a job will never get one. In a normal world the government would renege on its job/wage guarantee by printing, but in an EMU world it doesn’t work…

Being trapped in the single currency could actually allow true reforms to take hold. The easy way out through inflation and devaluation would solve the immediate problem of competitiveness, but it would not solve the real problem of having government price controls in the labour market…

So being in EMU could theoretically generate a change in southern European labour markets that begins another massive bull run!

And while Zervos suggests thatĀ allĀ of the PIIGS might not be able to manage such a change, he says he “remain[s] hopeful” that these economies will throw off the restraints of their “socialist nanny state.”

Read Zervos’s full explanation and more at Jefferies Market Commentaries >

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