Wolf Richter published an excellent piece on the economic realities in Europe, and I've focused upon that, herein. Added bonuses in this post include Yves Smith, over at her Naked Capitalism blog less than 24 hours ago, debunking the hype about the so-called European "recovery," and a reminder from Tim Geithner, 23 months ago, about why--here across the pond--this affects us more than most either realize or fail to admit.
[Diarist's Note: Wolf Richter has provided written authorization to the diarist to reproduce his posts in their entirety for the benefit of the Daily Kos community.]
It’s Official: Despite Media Hype,
Eurozone STILL in Recession
Wednesday, June 18, 2014 at 5:13AM
The media and statistical agencies have been bursting at the seams with stories about the Eurozone’s increasingly healthy economy. Government budgets remain a mess. But no one really cares as long as bond markets are willing to fund these deficits and roll over the debt at record low yields even of bailed-out countries with over 20% unemployment and spreading misery.
The European economy has simply been on a roll since 2012, according to the soaring stock indices. Politicians and Eurocrats have taken credit, and a whirlwind of backslapping has ensued.
But there have been indications that things are still a little rough. Despite soaring stock markets, ceaseless hype, and analysts’ estimates of double-digit earnings growth in the future, corporate earnings in Europe peaked in July 2011 and have been declining ever since [read.... Selling Your European Stocks Before Everyone Sees This Chart?...
(continued from above)
...That was just me pointing it out a few days ago. Now comes the Centre for Economic Policy Research, a network of over 800 top economists conducting research on the European economy. CEPR dates recessions for the Eurozone – though not for individual countries. Similar to the National Bureau of Economic Research in the US, it defines recessions not mechanically as two quarters in a row of declining GDP, but considers other factors, such as unemployment and the strength of the recovery. And it just released a 20140611 Findings.pdf report, following its Committee meeting, that supports what corporate earnings have been clamoring about for a while: the Eurozone recession that started in the fourth quarter of 2011 still isn’t over.
The Committee placed the end of the prior recession in Q1 of 2009 – things can fall off a cliff for only so long before they hit bottom. Then economic activity took off and peaked in Q3 of 2011. After 10 quarters of expansion, the economy for all Eurozone countries combined had grown 4%. It was a start, but it wasn’t enough; output remained 2% below the pre-recession peak. By that time, the debt crisis was spreading to core countries. Banks toppled and were bailed out even in Belgium. And in Q4 2011, the next recession started.
But in 2012, the entire debt-crisis fiasco was solved with a few elegant words – ECB President Mario Draghi’s “whatever it takes” – backed by the ECB’s printing press. Markets loved it. Even beaten-down, haircut-decorated Greek debt soared.
In 2013, all sorts of organizations and political figures came out to declare an end to the recession, first country by country, then for the Eurozone overall. Hope was in the official air. It was the time to get people, even the still growing masses of the unemployed in France, to believe that things were on the right track, that Eurocrats in Brussels and local politicians, even the most despised President in the history of France’s 5th Republic, François Hollande, were somehow doing the right thing, and that soon, there’d be an uptick of some sort, even if people couldn’t notice it just yet, or maybe ever.
So in October 2013, under pressure from various political directions, and bombarded with budding recovery stories from the European Commission, statistical agencies, forecasting institutions, international organizations, and the daily media circus, the CEPR Committee decided to meet in Paris to determine if there was indeed enough evidence to call an end to the recession. But on October 19, the Committee released its findings: “while it is possible that the recession ended, neither the length nor the strength of the recovery is sufficient, as of 9 October 2013, to declare that the euro area has come out of recession.”
That was bad enough. But it left room for hope. Maybe more evidence would soon tip the scales and allow Eurozone politicians and Eurocrats to move forward with a self-satisfied grin that confidently speaks of how they’d conquered the crisis. Alas, after meeting once again, this time in London, the Committee just now slashed those hopes (and even used bold print to do it):The Committee observed that since early 2013 the euro area has witnessed a prolonged episode of extremely weak growth in economic activity: Euro area GDP has risen by less than 1% from 2013Q1 to 2014Q1 and labour markets have shown little change over that period. Had the improvement in economic activity been more significant, it is likely that the Committee would have declared a trough in the euro area business cycle in early 2013, most likely in 2013Q1. The lack of evidence of sustained improvement of economic activity in the euro area does, however, preclude calling an end to the recession that started after 2011Q3.Then the Committee came up with a new twist to express the mysteriously eternal nature of the Eurozone recession, once again in bold: “the euro area may be experiencing since early 2013 a prolonged pause in the recession that started after 2011Q3.”
This was unwelcome news to Eurocrats and the crisis solvers of the Eurozone. But it was not news to the unemployed in France, Spain, Greece, Portugal, and many other countries. They’ve been seeing first-hand that much of the recovery hype was just hype. It’s another piece of evidence, as if more were needed, that doing “whatever it takes” to bail out bondholders and stockholders of banks and big corporations – and then suffocating workers by cutting their wages and benefits and raising their taxes – isn’t conducive to the real economy.
I was interviewed on that topic by Jorge Nascimento Rodrigues for “Janela na web” (a Portuguese site) and the printed edition of Expresso. But after what I said, he might never interview me again...
# # #
Here's Yves picking up where Wolf left off...
Debunking the Hype about the European “Recovery”
June 19, 2014
Just because periphery county bond yields are down thanks to the tender ministrations of the ECB does not mean that Europe is on path to a recovery. And in a even clearer-cut case than the US, a technical recovery (as in hitting a bottom and showing some improvement from that) is a terribly pale shadow of the real think.
A new and suitably data-driven post by Zsolt Darvas and Pia Hüttl at the Bruegel blog throws cold water on the notion that Europe’s hardest-hit economies are on the mend. The key section:Do these undoubtedly benign developments suggest that the three euro-periphery countries [Portugal, Greece, and Ireland have reached a sound and robust fiscal situation? Unfortunately, the answer is no….On the one hand, our findings continue to suggest that the public debt ratio is set to decline in all three countries under the maintained assumptions and in fact their future levels are now projected to be slightly lower than in our February simulations (eg for 2020 our new results are 2-3 percent of GDP lower). But on the other hand, the debt trajectories remain highly vulnerable to negative growth, primary balance and interest rate shocks, especially in Greece and Portugal, though also in Ireland.
For example, if nominal GDP growth turned out to be 1 percentage points lower than in our baseline scenario (either due to weaker real growth or lower inflation), Greek public debt would still be 133% of GDP in 2020 and 113% in 2030, the Portuguese debt ratio would be 119% in 2020 and 106% in 2030, while the Irish debt ratio would be 107% in 2020 and 87% in 2030…
Under the combined shock of 1 percentage point slower growth, 1 percent of GDP smaller primary budget surplus, 1 percentage point higher interest rate and 5% of GDP additional bank recapitalisation of the banking sector by the government (which is not an extreme scenario), the debt ratio would explode in Greece and Portugal and stabilise at a high level in Ireland (Figure 2).
Furthermore, we highlight that our goal with the debt simulation was not the calculation of a baseline scenario which best corresponds to our views, but to set-up a baseline scenario which broadly corresponds to official assumptions of the IMF and the European Commission and current market views….
We think that today’s markets may be overly optimistic…ill remain a challenge when there is an austerity-fatigue in most periphery countries. Also, the weak euro-area growth and too-low inflation do not favour debt sustainability of the euro-periphery…
# # #
And, speaking of being
self-serving overly optimistic, Tim Geithner's just coming off of his "victory lap" via the conclusion of his (poorly-reviewed by many) book tour; and after reading same, far too many are wondering what the guy's smoking due to his feeble attempt--in the book--to revise the history of his tenure at the Treasury Department. (Of course, anyone running a too-big-to-fail bank would find many reasons to disagree with my statement. But, those that would disagree are too often being paid to do so! Nice gig if you can get it.) So, here's Timmy, in a flashback to 2012, telling us why Europe's prolonged economic downturn is a bad trip for the U.S. economy, too...
Geithner: Europe threatens U.S. economy
By Jennifer Liberto @CNNMoney
July 25, 2012: 10:01 AM ET
WASHINGTON (CNNMoney) -- The biggest threat to the U.S. economy is Europe, Treasury Secretary Tim Geithner said Wednesday.
"The economic recession in Europe is hurting economic growth around the world, and the ongoing financial stress is causing a general tightening of financial conditions, exacerbating the global slowdown," Geithner said in testimony before the House Financial Services Committee.
Geithner's testimony comes as part of his role as chief of a regulatory group called the Financial Stability Oversight Council…
# # #