Why has the Euro-zone fallen back into recession, and why can’t it shake of its seemingly never-ending crisis? Is there light at the end of the tunnel – or is that an approaching train? A walk through the Euro-zone with charts of macro-economic data reveals the crisis is far from over. Instead, most trends are pointing towards further deterioration – facts as opposed to the hope and anecdote that we are bombarded with on a daily basis. While perusing these charts, consider EU President Barroso’s comments just today that, “the worst of the crisis is over.” You decide.
Full chart pack below…
While retail sales are stagnating in Germany, they are shrinking dramatically in countries that had to be bailed out.The Netherlands are again a surprise, with similar development as in Hungary. In Germany and France, industrial production peaked in early 2011. Other countries (Greece, Spain, Portugal) never really recovered.
Finally, a look at the banking sector. Deposits in Spain and Portugal are bleeding with annual rates of 10%. This, together with rising non-performing loans and increased capital requirements will make banks reduce their lending, choking small and medium-sized companies.This is reflected in declining loans by financial institutions in the PIIGS (with the exception of Italy – for now).
1. GDP is pretty useless as indicator of economic strength, as it ignores debt accumulated by the largest contributor to GDP (governments).
2. If one thing can be gained from looking at real GDP it is the fact that, over the past 12 years, Italy’s growth has been inferior to that of Japan. Without any grow, even otherwise (borderline) sustainable debt levels become too much of a burden on the economy.
3. Even in times of rapidly declining revenue, governments are unwilling or unable to cut spending unless forced to do so by EU/ECB/IMF. This is the reason why most countries try to resist any bailouts until it is too late (usually when the capital market refuses to further finance its debt).
4. Governments do not have any cash reserves; insolvency is only a failed debt auction away and can happen at any time.
5. Trade imbalances of the PIIGS are on the mend (but without the major beneficiaries, Germany and Netherlands, giving up any of their surpluses).
6. The average interest paid on government debt is surprisingly uniform (3-4%); the subsidy of being member in the Euro zone does not enforce fiscal discipline.
7. Unemployment, and especially youth unemployment provides for potentially explosive social tensions and/or radical political movements, making governing more difficult.
8. Debt-to-GDP ratios continue to rise as required fiscal adjustments are too large and recessionary trends take their toll on government finances.
9. Despite recent improvements, Germany has still a large advantage in unit labor costs.
10. Declining house prices in Spain and Portugal will continue to weigh on banks.
11. Collapsing retail sales and industrial production in the PIIGS continue to erode the tax base.
12. In Spain and Portugal, trends in deposits look to undermine the banking system and choking small and medium-sized companies.
- Developments in Spain and Italy will lead to further deficits and increase in debt levels.
- At some point, capital markets will refuse to absorb new debt.
- ECB/EU/IMF will be forced to step in, as local banking systems are loaded with government bonds.
- Any government bond restructuring would also impair the banking system.
- Rumors regarding the solvency of banking systems could trigger bank runs, as depositors are warned by the Cypriot example.
- Many years of further austerity seem to be the inevitable result, with potential political and social instability sprinkled in.
- Central banks might be able to paper over (literally) a collapse of the Euro-zone, but still won’t be able to prevent stock markets from reacting negatively to recurring crises
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