EU moves closer to recession

The EU Statistical Office, Eurostat, reports that in the second quarter of this year GDP shrank 0.2% compared to the previous quarters. The decline was both in the Eurozone and the 27 member European union.

After a disappointing zero per cent growth in the first quarter, Europe edged closer to recession as the GDP actually shrank this quarter. The decline in the Eurozone itself was 0.4%, greater than in the larger Union. Given the zero growth in the first quarter and the decline in output in the second quarter the EU is edging perilously close to a recession. A recession is usually defined as two consecutive quarters of declining output.
The dismal results are in part due to the debt crisis that has required bailouts for several countries. Greece, Ireland, Portugal and Spanish banks have all received aid. Italy too faces a debt crisis and increasing borrowing costs. To tackle debt many countries have imposed severe cuts in government spending and slashed wages and pensions. The resulting decline in demand has often lowered economic output and made the debt situation even worse by sending economies into recession. Greece is among the worst hit by these policies.
The Greek economy shrank by 6.2% in the second quarter. The Greek government is scheduled to make even more cuts so that the decline will no doubt continue. The unemployment rate in Greece has climbed to 23.1% but among those under 25 the rate is a huge 55 per cent. Given this level of unemployment further cuts will face fierce public resistance. The coalition government has asked for a longer time period to achieve debt reductions. Greece has already experienced five years of depression.
The EU is falling behind the U.S. and Asian economies in GDP growth. The United States grew by 2.2% this quarter. In Asia even the Japanese economy grew by 3.6%. Within Europe Germany has still managed to grow during the crisis although only at a very slow rate. In the second quarter German GDP grew by 0.3%. Although this is above the 0.2% forecast it is still far from robust growth! Exports have been growing faster than imports and both public and private spending have increased. Analyst Annalisa Piazza said:
“The German economy remains relatively resilient and the expected effects of the euro zone debt crisis remained limited.”
France posted zero GDP growth. French president Hollande has opted to postpone austerity measures and try to promote growth but so far the economy is still sluggish. The French Finance Minister predicted 0.3% growth for 2012.
Other countries in the EU also had shrinking economies. Portugal had a 1.2% decline, Spain 0.4% and even Finland in northern Europe had a one per cent decline. Italy also faces problems.as its GDP shrank 0.7% and its borrowing costs are rising.
The debt crisis in Europe is far from over as depression threatens the entire EU as a group.. Effects of the crisis are felt globally as trading partners face falling demand from the EU.

World Bank warns European officials to act on debt crisis immediately

The head of the World Bank Robert Zoellick said in the Financial Times that it is time to pull the emergency alarm. He wrote: "while those living in the euro-zone building, especially those on the executive floors, will not want to hear an alarm, they had best read the instructions. Events in Greece could trigger financial fright in Spain, Italy and across the euro zone, pushing Europe into a danger zone."

While the concern about events is hardly new there is an increased urgency about warnings. The stock markets today (June 1st) in the U.S. Canada and Europe have taken notice with big drops. European officials are warning that actions must be taken immediately before events spiral out of control. But that seems to be what is happening in Spain and Greece.

The European Central Bank leader Mario Draghi warned that that the euro structure as it stands is "unsustainable unless further steps are taken" He added that leaders "must clarify what is the vision … what is the euro going to look like a certain number of years from now?"

The Italian Prime Minister Mario Monti demanded that the European Stability Fund be allowed to directly provide capital to struggling banks. The move is opposed by Germany.

Events in Spain are one important immediate cause for concern. The central bank noted that 97 billion Euros had left Spain in the first three months of 2012 alone. This amount is equivalent to 10 per cent of the Spanish economy. This makes clear that Spaniards have no faith in their own economy or government.

The central government is injecting money it can ill afford to rescue Bankia the third largest Spanish bank. As a result borrowing costs for ten year bonds are climbing to near 7 per cent an interest rate that the government simply cannot afford. For much more see this Der Spiegel article.

Euro currency zone economy to shrink in 2012

The EU executive warned that the EU zone economy will decline for the second time in three years. The executive warned that the euro currency area has yet to break the debt cycle in some countries.

Oli Rehn the EU Economic and Monetary Affairs Commission said however:"Recent developments in survey data suggest that the expected slowdown will be rather mild and temporary," "But the turnaround of the trend still needs to be confirmed in the coming months and it essentially depends on the policy decisions to be taken,"

The Commission report predicted that output in the 17 countries sharing the euro currency is likely to contract .3 per cent in 2012. Earlier growth was predicted of .5 per cent. Economic growth in the larger 27 member EU is expected to be flat this year.

The Euro zone's last recession was much more severe with the economy contracting by 4.3 per cent in 2009. High debts, reduced investor confidence and a rise in unemployment have killed off the recovery. Many economists predict growth only in 2013.

The IMF view is slightly more pessimistic than the Commission report. The IMF predicts production will decline by .5 per cent this year with a modest recovery in the last few months of 2012. If debt issues are not resolved the situation could be even worse. For more see this BNN article.

Clive Crook: Greek deal leads Europe down road to disaster

Clive Crook is an editor of the Atlantic Monthly, and writes for the Financial Times as well as Bloomberg among other publications. This material is summarised from a Bloomberg article.

Crook thinks that the Greek bailout deal is simply a holding action one that does not deal with the larger confidence issues facing Europe. The losses to private lenders will be about 75 per cent of the value of their holdings as the face value of Greek bonds is cut by about half and a low interest rate will be paid.

Providing enough private lenders go along with the deal new official loans will be provided that will service the Greek deficit and upcoming payments due. The loans involve various subsidies and a low interest rate. The IMF is supposed to take part as well but it is not clear how.

Clive notes that if too many private lenders reject the plan the deal must be changed. He notes too that the Greek government may have problems passing the required legislation. This includes drastic cuts to the minimum wage, make debt-service payments into an account that will be monitored externally. Also the Constitution has to be amended to make debt repayment the first priority. Finally the government must accept that a team of EU officials monitor public accounts. The end of democracy in Greece and rule by financial capital--my words not Crook''s!

Clive suggests that if Greece postpones changes such as lowering wages and delays privatisation then dependence on official loans will grow. I thought that if Greece were to do this it would not even get the loans in the first place.

The EU has chosen to keep muddling through without ever doing enough to resolve the problem. Clive admits that so far unilateral default has been avoided. Clive thinks that perhaps the rational principle behind the EU approach is this: "Let's build this manageable problem up into a crisis capable of vast destruction that we might be unable to control. That will create the fear needed to force some real improvements in economic policy."

According to Crook creating this panic turns a liquidity problem (difficulty in borrowing) into a solvency crisis, as government debt balloons. The EU policy seems to be to maximize panic. Even many EU officials believe the bailout plan will not work and that Greece may default maximizing panic.

However Crook thinks that the EU has no plans to deal with this contingency of the deal not working even though it could bring disaster. Clive thinks that the Greek economy is small enough that the rot could be stopped. Greek debt should simply be written off. Until Greece can start growing again and get a surplus that would allow it to borrow on the private market Europe should provide financing. Greece should continue using the Euro rather than reverting to the drachma.

European banks need to be recapitalised and the EFSF increased. It may even be necessary to do in Ireland and Portugal something similar to what he recommends in Greece. I find it doubtful that European Finance capital is willing to take a haircut of the proportions Crook suggests. No doubt there will be arguments that the Crook policies involve a moral hazard by encouraging reckless debt with no appropriate punishment. To avoid such a moral hazard one should cut wages, pensions ,, health care, education and sell off state assets at fire sale prices. For more see the full article.

Eventually the working class will be suitably weakened so that Greece will be competitive in providing telemarketers with Greek accents to service global corporations.

Portugal debt status worsens

   Portugal's debt status worsened as underwriters raised the cost of insuring its bonds to new highs. Both business and consumer confidence hit new lows.
   Consumers in particular were hard hit by painful austerity measures. Banks offering insurance to holders of Portuguese debts have been demanding  very large payments when a contract is signed rather than spreading the cost over the period of the contract. Portugal is now second to Greece in the amount required to insure its debt.
   Standard and Poor's rates Portuguese bonds a "junk"status. The yield on Portuguese ten year bonds has risen to just under 16 per cent. This is over twice the rate that is considered sustainable. This is just another sign that Portugal will require another multi-billion dollar bailout from the EU and IMF. It already received 78 billion euros earlier. For more see this BNN article.

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