Europe’s Good News: Economic Decline Is Bad, but Could Be Worse

A flurry of new economic data in Europe indicates that the slide of the euro zone toward recession isn't as rapid as some had expected — though it is still steady enough to represent a major threat to the global economy

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From left, Spanish Prime Minister Mariano Rajoy, French President François Hollande, German Chancellor Angela Merkel and Italian Prime Minister Mario Monti attend a media conference at the end of a meeting at Villa Madama, Rome, on June 22, 2012

Even when developments in the euro zone are both better than expected and (relatively) positive, they still mostly highlight how dire Europe’s wider economic outlook is.

That was demonstrated again on Aug. 14, when new figures showed 0% second-quarter growth in France, allowing the country to escape an expected slide into recessionary territory. In the meantime, Germany reported second-quarter expansion of 0.3% amid falling exports to elsewhere in the crisis-racked euro zone. That iffy result nevertheless exceeded the 0.2% quarterly German GNP figure most economists had predicted and helped cheer markets a little.

This is what passes for good news in Europe these days.

The dribble of (barely) glass-half-full announcements didn’t stop there. Later on Tuesday morning, the E.U. said the 17 euro-zone economies collectively shrank by 0.2% compared with their flat growth in Q1. Yet because that contraction was widely anticipated — and because the French and German performances were slightly better than expected — markets in Europe responded to those not-exactly-thrilling results with a positive bounce. By midday, virtually all bourses across Europe were showing rises from 0.4% to nearly 1%.

The small glint of silver linings within Europe’s darkening economic gloom were first seen on Monday — though it took a lot of squinting to catch any sparkle. On Monday, Greece said its pace of economic decline had slowed to 6.2% in the second quarter — down from 6.5% shrinkage in the previous period. Earlier Italy said it would miss the budget-deficit target the government had set for itself because of slowing economic activity. Yet once figures are adjusted to declining growth levels, officials in Rome said, Italy will still meet the reduced spending limits set by the E.U.

“We know there will be a worsening of the nominal deficit,” Italian Finance Minister Vittorio Grilli told La Repubblica on Sunday. “Nevertheless, our compass remains the structural deficit, and on that we are and we will be perfectly in line … When this recession is over, [debt-reduction efforts] will permit a lowering in the debt-to-GDP ratio of 20% in five years.”

Yet given the acute urgency of the financial crisis, not only do multiyear debt-reduction horizons seem incongruously far off; so too do visions of recovery from a recession that only seems to be deepening and spreading. Italy is already mired in an enduring economic slump, as are Spain, Portugal, Cyprus and Greece. Indeed, Athens’ descent into recession began a full five years ago. France’s flat Q2 result — its third 0% quarter in a row — may have allowed the nation to avoid joining the recession club, but it pours cold water on government assurances that its modest full-year growth estimate of 0.3% will be fulfilled. And with economies tanking elsewhere in Europe, Germany’s export-driven growth is now in serious danger of losing what little momentum it has left.

All of that risks dragging Berlin and Paris into the same dire dilemma other euro capitals have confronted — often without sympathy from French or German leaders. The dreaded sequence is now familiar. Declining or shrinking growth produces less income for state coffers. That, in turn, forces governments to slash spending in order to meet E.U. deficit and debt-reduction obligations. But lower public spending further undermines economic activity — and with it state-revenue inflows — requiring renewed growth-sapping cuts to meet targets. And so it goes within what has become an accelerating downward spiral.

To break that vicious circle, France’s Socialist President François Hollande joined Italian Prime Minister Mario Monti and Spanish Premier Mariano Rajoy in June to demand that growth stimulus be added to the new E.U. fiscal pact aimed at resolving the euro zone’s economic crisis. However, critics contend most of that funding simply redirects relatively modest sums of money already earmarked as stimulus for other European projects — the impact of which may be limited at best. Just as bad, most observers warn, that pro-growth financing will be long in coming, and it’s needed right now.

Indeed, since that June compromise the economic situation has only gotten worse in Spain and Italy, and has also sufficiently slowed to push France and Germany closer to recession. The continued collective decline also risks producing major political consequences. As his presidential predecessor, Nicolas Sarkozy, painfully learned in his failed re-election bid, Hollande is seeing how his leadership abilities will be judged by his management of the economic crisis. A new poll published just 100 days into his term shows a majority of French voters unhappy with Hollande’s performance. That level of discontent is certain to rise if, as expected, several big French companies announce lay-off plans this autumn.

Hollande’s popular mandate to deal with the crisis isn’t the only one shrinking. Monti’s and Rajoy’s approval ratings are in even worse shape, and both have faced massive street protests recently. And even though most Germans approve of the hard line Chancellor Angela Merkel has taken with euro partners that have spent themselves into indebted calamity, it’s far from certain that support will remain strong if the country’s reformed and robust economy winds up being dragged into recession within Europe’s slide. That’s no small consideration with Germany heading into general elections in 2013.

As has been the case from the start, euro nations and leaders will only survive their current crisis by banding together as a united whole. Failing any emphatic steps toward real integration, no news or developments within the European economic storm will ever be good enough to signal an end to the euro’s woes.

9 comments
Ahra Ah
Ahra Ah

usa is totally out of the picture with highest debt. the mainstream media have successfully shifted all the attention on europe as if usa has fully recovered. with 100 million people on some kind of handout and with the debt that will never be able to repay but somehow , miraculously usa is kept out of the spotlight ! 

Jocuri
Jocuri

It will be worse just wait

tomthumb015
tomthumb015

I don't think Greece will survive in the euro and be out by the end of summer. Here in northern Europe their is a growing resentment that northern Europeans are expected to bail out corrupt and big spending public sector countries in the south like Greece, Italy, Spain, and Portugal.

zza371creek
zza371creek

The EU is going to have to stop cutting. The government is the largest employer in all developed countries.  They only hurt themselves by cutting as proved with Greece which has been cutting for 5 years and still has not gotten them any place?

They need to start spending again which will help create jobs. The united states did not cut but spent 5 years ago while we don't have great growth we do have growth.

Nonaffiliated
Nonaffiliated

 What you should realize is that when a government spends money it doesn't have, there are only two options to pay for it:  borrow from future generations or inflate the currency.   They have already borrowed all they can, as evidenced by bond yields over 7% for countries like Greece and Spain.   Even German yields are rising as they've acquired billions of euro's in new liabilities as part of the various bailout packages.

So, to continue spending as you suggest, the only option is to inflate the currency.  Do this and you will destroy retirees' savings and reduce the purchasing power of every citizen's paycheck.  You might think that's a reasonable price to pay in order to put everyone back to work.   However, there's a further problem.  Interest rates on all that government debt will go through the roof when they adopt inflationary monetary policy.  A large percentage of your newly created money will just go to pay higher interest on the debt, requiring you to print even more money creating even higher interest rates.   Unless the real deficit is controlled, this scenario doesn't end well.

The USA has been able to afford historically massive deficits because we started from a position of less debt than most European nations.  However, after 3+ years we've just about caught up.  And, in return we still have unemployment over 8% and a near-trillion dollar deficit.  We're running out of time for this "spend our way to prosperity" plan to work.  And, even if it does, how many future budgets will be handicapped by the interest payments?

zza371creek
zza371creek

 Interesting point. But if what you said is true. When the united states spent well over 100% of GDP during world war 2 and right after. Inflation should have sky rocketed and the future dollar power would have been hurt? Yet the world war 2 generation did well in retirement? 

Inflation was keep in check and the united states enjoyed 40 years of economic growth.  The reason it worked was because the united states put in high taxes in the future to remove the extra money put into the system during world war 2.

Just like the depression once growth starts and people feel better growth feeds on growth. The entire reason a depression last is because of how people feel. The shock of the crash of 1929 kept people from spending normally for years.

Also if the economy does not grow the future of retirement programs are in trouble because they cannot make any money in the stock market or investments currently which hurts future investment growth.

Spending is the only way the EU can fix the problems they have and to become a true country and not have union.

Nonaffiliated
Nonaffiliated

In fact, US inflation rose to almost 20% by 1947.   Luckily, patriotic (stupid?) Americans bought enough war bonds to keep interest rates low.  I don't think you would have much luck selling modern investors 3% bonds during a period of 20% inflation.