To explain the difficult situation in Europe, one has to go back to the functioning of the European Monetary Union. In effect, a number of countries in the so-called periphery, although they are some of the affected countries--particularly Portugal, Greece, and Spain specifically--ran very large current account deficits within the monetary union. Part of the reason they ran those deficits is that the relative rise in unit labour costs in those countries was quite high, of the order of magnitude of 20% to 30% higher than at the Franco-German core of Europe.
So they lost a lot of competitiveness over the course of the first 10 years of monetary union, and the challenge that these economies face is to regain that competitiveness. This is not a good place to be in, but one of the advantages of a flexible exchange rate is that the exchange rate does some of the work for you in regaining that competitiveness. The other alternatives are large structural reforms to improve or build productivity and product in labour markets, and other aspects. They're the right things to do, but those take time to pay off—over the course of several years at least. And then second is to reduce wages. I don't mean stagnant wages, but outright reductions in wages so that unit labour costs come down, which, of course, in and of itself reduces demand and has a self-reinforcing aspect on any slowdown. That means a direct hit to confidence, and lower spending. And then, because of lower spending, higher unemployment, etc., will result.
That is the situation these economies find themselves in. The lower growth further worsens the fiscal positions of the countries, which forces additional austerity. Because they face budget constraints, the markets are only willing to lend them certain amounts of money, and that is amplifying the downturn. So you have more severe recessions in an increasing proportion of the eurozone, which in our opinion is now going to result in an overall recession in Europe.