Odds stacked against peripheral Europe

Economists are worried about the possibility of a double-dip recession in the U.S. even as the country keeps stimulus measures intact and gets ready for a second round of quantitative easing.

On the other hand, peripheral Europe doesn't even have those two luxuries and faces additional disadvantages. For those countries, the odds of a strong, sustained recovery are stacked against them.

Austerity

The peripheral European debt crisis has forced these countries to cut spending and raise taxes. These measures are already implemented or will be in the near future at a time when their recovery is still fragile and worldwide private demand remains weak.

Mainstream economists like Paul Krugman of Princeton University argue that in times like these, government stimulus should be increased or maintained instead of being decreased. Cutting back on public demand, at a time when private demand is lacking, exacerbates risks of a double-dip recession and deflationary spiral.

Exports

Many countries struggling to recovery quickly, like the United States, are looking to export their way to prosperity. The United States is likely to succeed to some degree because quantitative easing is devaluing the dollar.

President Obama is also aggressively promoting U.S. exports in countries like India. If the U.S. is willing to share some commercial technology with these countries, it just might succeed on this front, said Richard Kang, chief investment officer of Emerging Global Advisors.

Peripheral European countries using the euro, on the other hand, can do none of that. In fact, in the global currency wars, the European Central Bank is the only major player not to take steps to competitively devalue its currency. Andrew Balls, head of PIMCO's European Investment team, said the euro's recent rally does not reflect growing confidence in the currency, but is merely the result of devaluation by other currencies.

It gets worse.

The euro common currency reflects the economic fundamentals of many countries, and some of members will obviously have an undervalued currency relative to their individual fundamentals and others will have an overvalued currency. Germany falls in the former category and peripheral Europe the latter.

Peripheral European countries mainly export to other countries in the euro zone. Their second largest exports market is usually the United States. Unfortunately, these two regions are two of the slowest growing in the world.

Banking Sector

Lastly, European banks are in worse shape compared to the U.S. and much of the world. Nicolas Veron, a senior fellow at Bruegel, a Brussels-based think tank, said U.S. banks are past the financial crisis because of early restructuring and recapitalization. However, European banks did not recapitalize and restructure as well and are thus behind in the healing process.

Email Hao Li in New York at hao.li@ibtimes.com.