7 Oct 2014

Is Europe’s economic house of cards about to collapse?

Germany suffered its sharpest drop in industrial production since 2009 in August: factory output fell by 4 per cent – surprising analysts who had expected it to fall more slowly, and boosting fears that Germany will enter recession.

Naturel Gas, Gas-Pressure Regulator Station In Bonn.

Industrial production is just one economic indicator but, as Germany is the workshop of Europe, the slowdown reflects a wider problem hitting Eurozone economies: stagnation.

Italy, France and Germany – the three core economies – are all hovering around either zero growth (for the first two) or growth way below par in Germany’s case. The IMF, in its updated World Economic Outlook, said there was a even a one-in-three chance of the whole Eurozone entering recession this year.

Source: IMF World Economic Outlook

And the reason is pretty clear: demand in the Eurozone is suppressed by its busted banking system, which is being made to mend itself, and therefore cannot stimulate the economy through lending.

Unlike Britain the Eurozone’s central bank can’t do quantitative easing (printing money). Nor are the core Eurozone economies prone to cheap labour and property speculation, which have allowed Britain to create hundreds of thousands of jobs without raising wages, and the property market to help revive the rest of the economy.

‘A blank IOU’

So all eyes are now on the European Central Bank. It has promised to re-start “unconventional” monetary policies – buying up pieces of paper called “asset backed securities” to put ready cash into the banks.

But few economists believe this will be enough. On the ECB’s stated aim, of pumping about three trillion euros worth of cash into the economy, it will need around another trillion – and that will have to come through outright QE.

Technically the ECB is not allowed to do this: it would be like Germany signing a blank IOU to the rest of the Eurozone economies. Privately much of the German political class – which has resisted Euro-QE – is coming round to printing money.

But the German electorate is getting very antsy: 12 per cent support for the anti-Euro Alliance for Germany party in two regional elections in September are a signal of that.

No time for schadenfreude

So what people in the markets think is this: the ECB’s boss, Mario Draghi, will do everything he can short of printing money until the new year. Then, as their beloved vorsprung durch technik economy slides into recession, the Germans will come around to letting him print one trillion euros and give it to the banks.

Draghi has already spelled out what the alternative is: abandon the tight austerity targets Europe imposed on itself after the 2010 crisis. But this, too, is deemed politically unacceptable.

So the Eurozone economy remains becalmed – by the aftermath of the banking crisis and the continued inability of policymakers to do the right thing at the right time. The full ghastly picture will come out when the European Commission releases its monthly update on the economy on Thursday.

If you’re thinking of unleashing schadenfreude, don’t. Germany is a big export market for Britain, as is the whole of the Eurozone. If they don’t grow, ultimately, large parts of the UK economy does not grow either. And if that happens, under the fiscal rules set by the coalition government, there would have to be more austerity into the future.

And if the sicker parts of the Eurozone go into deflation – Italy and France are on the brink of that – then the whole Eurocrisis will be back on.

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7 reader comments

  1. Alan says:

    Given the trillions of debt imposed upon Europeans, their children and grandchildren which Europe do you refer to?

  2. Edward Harkins says:

    Let’s hope that the Eurozone policymakers take note of what happened with UK PM Brown and Chancellor Darling when they so generally used tens of millions (or more?) of taxpayers money via QE to ‘help the banks. The outcome was fattened balance sheets for the banks – whilst of shortage of onwards lending to UK businesses continues to this day (meantime, of course, the banks have done little to move on from the high-remuneration-&-big-bonus-culture amid seemingly endless discoveries by regulators of banks’ serious misconduct). Alarm bells ought to be ringing when it can be said that;

    “So all eyes are now on the European Central Bank. It has promised to re-start “unconventional” monetary policies – buying up pieces of paper called “asset backed securities” to put ready cash into the banks.”

    Here we go again?

  3. Philip says:

    The 1930s revisited! Notice how austerity is massively increasing the votes of the far right in particular. When you rely on an economic policy that has already failed, you realise that the world is run by bankers and rich people largely unaffected by what austerity means in personal terms. For them austerity = lower taxes.

  4. Boffy says:

    The real problem in Europe is a political crisis rather than economic crisis. If Europe were a single state like the US, it could by now have followed the same path that worked in the US. It could have pursued a policy of fiscal expansion under the control of a single centralised state; it could have financed it from a single Debt Management Office, issuing Eurobonds, which backed by this large state would have had low interest rates, from which all Eurozone economies, including the periphery could have benefited. It couldn’t do that, because it isn’t a single state, and continued and outmoded nation state political structures, thereby prevent the required measures being undertaken.

    However, as I have pointed out in my book – http://www.amazon.co.uk/gp/product/B00MNHZCLU?*Version*=1&*entries*=0 – economic crises can be sparked by such political crises, as well as purely financial crises, such as stock market crashes, and credit crunches such as the financial crisis of 2008.

    The reality is that it is not QE that resolved the problem in the US. That ended the credit crunch, and since it has hidden the fact that global banks are insolvent, by reflating asset price bubbles in shares, bonds and property, on which the fiction of the banks balance sheets are based. But, it has done nothing to stimulate economic activity. That happened in the US – and in Britain prior to 2010 – due to fiscal stimulus not monetary stimulus.

    The monetary stimulus has simply recreated the conditions that led to the financial crisis of 2008, on an even greater scale, and that looks likely to result in an even bigger financial crash than 2008 in the not very distant future, as I outline in my book. But, from a purely economic standpoint, the global economy remains in a long wave boom. Growth in the new dynamic areas of that economy remains strong despite being dragged back by Europe.

  5. john goodyear says:

    why no mention of the effect the USA and European’s sanctions have had on exports. This is much worse for Germany, Merkel had been courting Putin for years at the rest of Europe’s expense.

  6. stukie says:

    QE pales into insignificance relative to the amount of money the banks have themselves created at the click of a mouse due to the way their accounting systems work in loan creation. Couple this with the government’s latest well hidden tax reform – brought to public attention via George Monbiot – that will exempt the banks from paying tax on money that has passed through tax havens ( only Switzerland does this) and still be able to claim the expense of funding foreign branches against tax liable in the UK, with a planned drop in the rate of corporation tax on the cards too. How will we fund any decent level of services with dramatically reduced tax income? why has the public not been made aware of this ? go figure.

  7. Gareth L says:

    Great analysis, but “Alliance for Germany” should be Alternative for Germany (Alternativ für Deutschland)

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