Europe's Economic Crisis -- Follow the Politics
If you've been following the
Eurozone's crisis but have found the economic technicalities trying (or worse,
boring) don't despair. The roots of the crisis, the obstacles impeding
solutions, and the consequences of success or failure are essentially
political.The technicalities of bond yields, the implications of creating
Eurobonds, the appropriate size and ground rules of the proposed European
Stability Mechanism (ESM), the proper role of the European Central Bank (keeping
inflation low vs. providing stimulus to economies crippled by massive
unemployment and stalled growth), and the pros and cons of cutting budgets as
opposed to running short-term deficits to create jobs and increase demand these are all undoubtedly important. But
ultimately the economic decisions will depend on what European leaders those needing help and those able to give
it decide they can do politically.German
Chancellor Angela Merkel leads the European Union's powerhouse and is certainly
no economic neophyte. She knows that the downside of pushing Greece and Spain
to slash public spending is that their unemployment rates could increase, thus
reducing demand and preventing the economic recovery that will produce the
increased tax revenues required to reduce their debt and increase their
creditworthiness. She also understands that the worse things get in Spain, the
more likely that the bond markets will make life untenable for Italy's leaders,
and that the euro itself will then be in (greater) peril.Yet Merkel isn't an
economics professor; she's a politician and, as such, can't ignore the
political reality that German taxpayers are unwilling to guarantee bonds that
will allow the Greek, Spanish, and Italian governments to borrow at lower
interest rates, or to make big contributions to schemes that will enable them
to revive their economies by spending more in hopes of creating jobs and
boosting demand. On the streets of Stuttgart or Hamburg, it doesn't much
matter what Keynes said. True, Germany's big export surpluses have been enabled in large measure by the big
imports of the very European countries now being castigated for their
profligacy. So it is in Germans' self-interest to help them recover. But
imagine Merkel the politician making this pitch to the German electorate. For
all the happy talk of the European Union having created a unity that has
transcended nationalism, the reality is that that stubborn sentiment remains
alive and well on the continent. Germans won't write checks or take big economic
risks for foreigners (even of the European variety) who, as they see it, are
suffering from self-inflicted wounds. Pumping huge sums of money over 1 trillion euros since
1990 into
the former East Germany was one thing; making sacrifices for Greeks and
Spaniards, let alone for "Europe," is another. Likewise, while Greek
and Spanish leaders understand that they must cut government spending, they can't
keep doing so at the risk of losing ground to opposition parties that accuse
them of succumbing to the diktat of a German-dominated EU and ignoring the
plight of the poor, the unemployed, and the retired. Elections are not imminent
in either country, but in democracies all politicians are exquisitely and
perennially sensitive to polls, and the risk of social unrest in Greece and Spain is ever present. So
imagine Greek Prime Minister Antonis Samaras telling his fellow citizens that,
yes, he feels their pain, but that, unfortunately, it's the price they must now
pay for their rampant tax evasion and attachment to social programs that had to
be financed by running red ink. Picture Spanish Prime Minister Mariano Rajoy
whose country's problems, unlike Greece's, stem from the insolvency of its
banks rather than outsize government spending giving a national television
address, the gist of which is that, yes, the bankers messed up and damaged the
economy, but now everybody has to pay for the repairs and that bigger bills
await. That refrain won't be well received at a time when a nearly a quarter of the Spanish
workforce is jobless and feels that it's footing the
bill for the blunders of well-heeled bankers.Politics also explains the roots
of the Eurozone's crisis. A common economic explanation is that what's
happening was bound to happen because the EU foolishly decided to create a
monetary union without a fiscal counterpart. That's true as far as it goes, but
the choice didn't result from economic illiteracy. Countries were simply
unwilling to transfer that much political power to distant European
institutions and bureaucrats. The primacy of politics applies to the future as
well. It's in the political realm that we'll see the biggest results of the
Eurozone's success, or lack thereof, in solving its economic crisis. If it
succeeds, the idealistic post-World War II project of pan-Europeanism will survive,
even if the Eurozone may not retain all of its current members. The
coordination of domestic and foreign policies and EU enlargement will resume,
albeit at a reduced tempo, and Europe will prove that it is indeed more than the sum of its parts. If it fails,
European politics will be transformed as parties with nationalistic, populist,
anti-immigrant platforms overshadow moderate ones. "European"
positions on major global issues will prove elusive. NATO's unity and sense of
purpose, already hard to maintain in a non-Soviet world, will fray as American
presidents, facing their own budgetary pressures, push European allies to spend
more on defense and the latter, preoccupied with domestic problems and facing
inward-looking voters, refuse.So if you find the economic details of Europe's crisis soporific keep your eyes
on the politics. That's the main event.
Eurozone economy shrinks by 0.2%
The eurozone's debt-ravaged economy
shrank in the second quarter, having flatlined in the first, despite continued
German growth which economists said could soon be snuffed out.The 17-nation
currency bloc contracted by 0.2% on the quarter, data showed on Tuesday.
Germany eked out growth of 0.3%, marginally beating forecasts, but its
forward-looking ZEW sentiment index slid for a fourth month running,
undercutting even the lowest estimate in a Reuters poll.Economists said worse
is likely to come and even Europe's largest economy is unlikely to defy gravity
for long unless decisive action is taken to tackle the bloc's debt crisis.
"Growth turned out to be pretty solid. But this could be the last positive
piece of news out of Germany for some time," said Joerg Kraemer at Commerzbank. "The
German economy could contract in the summer. It is fundamentally in good
structural shape, but can't decouple from the recession in the euro zone, plus
the global economy has also shifted down a gear."Aside from a downward
blip in the last three months of 2011, the eurozone has posted pretty
consistent, albeit anaemic, growth over the past three years although some of
its debt-laden members have been in recession for some time."Overall it
confirms the idea that the euro zone is in a recession phase," Aline
Schuiling, economist at ABN AMRO, said."What we see is a vicious circle of
budget cuts, high interest rates in the periphery and sovereign debt
rising," she said. "Policymakers are moving very slowly ... We expect
another contraction in Q3."For France, it was the third
consecutive quarter of zero growth. The central bank has already said it expects
a mild contraction in the third quarter. "These figures are not excellent,
but at the same time France is not in recession
while the majority of its European partners are," Finance Minister Pierre
Moscovici told Europe 1 radio. Safe-haven German Bund futures fell and European stocks rose
after the slightly stronger than expected German and French GDP reports. The
euro also rose though its climb was thwarted after the ZEW survey came in worse
than expected. The think tank's monthly poll of economic sentiment slid to
-25.5 from -19.6 in July. ZEW economist Christian Dick said the German economy
would slow due to weak growth in its main export markets, but would not
deteriorate sharply.Austria and the Netherlands almost matched Germany's
performance, each posting growth of 0.2%. But Finland, one of Germany's
northern European allies in pushing for austerity, suffered a 0.7% year-on-year
(y/y)fall in GDP.EU Economic and Monetary Affairs Commissioner Olli Rehn said
the European Union and European Central Bank (ECB) were ready to act if needed
to shore up the currency bloc."To my mind it is clear that both the
European Union and ... ECB are ready to take action once certain conditions are
met and if there is a request by some member state," he said in an
interview.Spanish and Italian bond yields have steadied since ECB President
Mario Draghi promised to do whatever it takes to save the eurozone although a
government would first have to ask for help from the bloc's rescue funds.For
the countries at the sharp end of the debt crisis, the picture is bleaker still
and as economies shrink, so do tax revenues, making deficit-cutting even harder
to achieve.That has fostered a growing debate inside and outside Europe about
the sense of austerity drives.Bailed-out Portugal's recession deepened with GDP
diving by 1.2% on the quarter and Cyprus contracted by 0.8%. Figures released
on Monday showed deficit-cutting measures helped to shrink Greece's economy 6.2% y/y in
the second quarter. Economists say the slump will persist as the government
scrambles to secure billions in additional cuts to keep bailout funds flowing. Italy's second quarter data
last week showed the economy contracted 0.7% quarter-on-quarter, compounding
the difficulties for Mario Monti's technocrat government as it tries to avoid a
bailout. Spain's economy shrank 0.4% over the same period, pushing it deeper
into recession. The big unanswered question is whether a weakening economy will
make Germany, the EU's paymasters, less likely to support government rescue efforts
for the broader eurozone. German Chancellor Angela Merkel has said repeatedly
over the past year that she will do everything to save the euro, most recently
after the ECB signalled it would intervene in the bond market to lower Spanish
and Italian borrowing costs.Not all Germans support that course and the
chancellor's room for manoeuvre appears to be shrinking at a time when both
Greece and Spain may soon require new rescues. However, if ordinary Germans
start to feel real economic pain, their response could be to demand their
leaders sort out the crisis that is now finally knocking at their door."I
have full trust in the German people and political leaders that they are fully
committed to the euro," Rehn said.It is quite possible that Madrid and Rome will seek help from
the euro zone's rescue funds and the ECB before the year is out. If so, most
economists expect the German economy at least to rebound after a gruelling
third quarter as confidence revives.Christian Schulz, an economist at Berenberg
Bank in London, said it was vital to get a grip on the euro zone crisis. "We
expect that the ECB has initiated a turning point with its signal of bond
purchases," he said. "After a weaker summer the German economy will
be able to grow faster again from the fourth quarter."
Eurozone narrowly escapes recession
The eurozone economy narrowly
skirted recession in the first half of the year, but austerity programmes
across the region and a debt crisis weighing ever more heavily on its periphery
suggest the reprieve will be short-lived. Gross domestic product (GDP) shrank
by 0.2% in the second quarter from the first after risk-averse businesses and
consumers reined in spending, European statistics agency Eurostat said on
Tuesday. Quarterly growth flatlined in January-March, meaning the region
averted the two consecutive quarters of contraction that define a recession.
Eurostat revised up the year-on-year GDP figure for that period to zero from a
0.1% contraction. Europe’s debt crisis intensified during the second quarter,
with Greece coming closer to an exit from the single currency and Spain struggling with a
banking crisis that pushed its borrowing costs to danger levels. Analysts agree
the gloomy picture is not about to change. “What we see is a vicious circle of
budget cuts, high interest rates in the periphery and sovereign debt rising,”
said Aline Schuiling, an economist at ABN AMRO. “There is still a lot of
uncertainty related to the crisis.” A decline in GDP from the end of last year
levelled off in the first quarter of 2012 as exports offset a plunge in
investment and inventories. “The economy is avoiding recession by the skin of
its teeth, but it will be a temporary reprieve,” Kenneth Wattret, economist at
BNP, said. “You could argue we have one leg in the recession already,“ said
Martin Van Vliet, economist at ING. “Leading indicators point to a further
contraction in the third quarter, so we might indeed see a technical
recession.” Tuesday’s flash GDP estimate for the second quarter was in line
with the average of economists’ expectations as polled by Reuters. Industrial
production, a key component of GDP, fell 0.6% in June from May and 2.1%
compared to June 2011, another reading from Eurostat showed. This was slightly
above forecasts of a 0.7% and 2.2% fall respectively. Earlier on Tuesday, Germany posted modest growth in the second quarter, while France stagnated, as Europe’s core gets drawn further into to
the debt crisis. German analyst and investor sentiment also dropped for a
fourth straight month in August, undercutting even the lowest forecast in a
Reuters poll, a survey showed on Tuesday.
