As if austerity were not enough, Europe is now suffering a second trauma, a "regional oil shock" due to the combination of rising oil prices on the global market and a falling euro. The price of crude on the continent has surpassed its historic peak, set in the pre-crisis commodity price runup. World markets are not as tight now as they were then, but the euro is almost 20% lower.
This should be setting off alarm bells across Europe, which still remembers previous oil shocks that sent unemployment to levels from which the European economies still have not recovered. And that was in a time when there was more fiscal headroom for cushioning job losses and easing the transition to a higher rate of structural unemployment. There is not much "give" in European economies at the moment, hence this oil shock may be even more difficult to absorb than previous ones. And what are Europe's two biggest economies, France and Germany, doing? They are dismantling--or in the case of France, proposing to dismantle--nuclear generating capacity in the wake of the "Fukushima shock." This is a terrible, terrible mistake. Whatever one thinks of nuclear power, this is not the time to make this move. It is simply astonishing to me that the German Iron Lady about whom I wrote in the previous post, who will hang tough in the face of withering criticism of her economic policy, was so quick to concede on nuclear retrenchment.