Thursday, February 21, 2013

Troubles of the eurozone

The conventional wisdom on which our mainstream press draw decided sometime in late 2012 or so that this eurorisis thing we kept hearing about the previous couple of years had faded away. Due to some magic conjuring in the mystic temple of the European Central Bank (ECB).

Bloomberg View expressed restrained skepticism about that assumption in Sorry, Europe, the Crisis Isn't Over 01/31/2013: "Financial conditions in Europe are improving, and the sense of imminent doom has lifted. Some commentators are daring to say that Europe's economic crisis is over. We think they speak too soon."

And they explain reasons for concern:

The International Monetary Fund’s economic forecasters have marked down Europe’s prospects yet again. They expect the euro area’s output to shrink 0.2 percent this year (a reduction of 0.3 percentage points since the previous forecast) and to recover very slowly in 2014.

Output is expected to shrink 1.5 percent in Spain (where unemployment stands at more than 25 percent) and 1 percent in Italy (where the jobless rate is almost 11 percent). Prospects that dire call into question Europe’s political stability, and that puts recovery in doubt.

Because of the single currency, there isn’t a lot that monetary policy can do to lift the region’s struggling economies. Fiscal policy continues to widen rather than narrow intra-European disparities. The region’s weak economies, under pressure to improve their finances, are trying hard to curb public spending and raise revenue, which adds to the contraction.
The ECB did quiet the immediate speculation. But how did anyone convince themselves that the crisis is over?

Martin Wolf isn't convinced, as he explains in Why the euro crisis is not yet over Financial Times 02/19/2013:

The eurozone is a bad marriage. Can it become a good one?

A good marriage is one spouses would re-enter even if they had the choice to start all over again. Surely, many members would refuse to do so today, for they find themselves inside a nightmare of misery and ill will. In the fourth quarter of last year, eurozone aggregate gross domestic product was still 3 per cent below its pre-crisis peak, while US GDP was 2.4 per cent above it. In the same period, Italian GDP was at levels last seen in 2000 and at 7.6 per cent below its pre-crisis peak. Spain's GDP was 6.3 per cent below the pre-crisis peak, while its unemployment rate had reached 26 per cent. All the crisis-hit economies, save for Ireland’s, have been in decline for years. (See charts.) The Irish economy is essentially stagnant. Even Germany’s GDP was only 1.4 per cent above the pre-crisis peak, its export power weakened by the decline of its main trading partners.
His conclusion is not especially sanguine:

Those who believe the eurozone’s trials are now behind it must assume either an extraordinary economic turnround or a willingness of those trapped in deep recessions to soldier on, year after grim year. Neither assumption seems at all plausible. Moreover, prospects for desirable longer-term reforms – a banking union and enhanced risk sharing – look quite remote. Far more likely is a union founded on one-sided, contractionary adjustment. Will the parties live happily ever after or will this union continue to be characterised by irreconcilable differences? The answer seems evident, at least to me. If so, this unhappy story cannot yet be over.
Yves Smith thinks that even in that column that Wolf is too optimistic, as he explains in Martin Wolf Misses the Real Reason the Eurozone’s Unhappy Marriage Has Not Broken Up Yet Naked Capitalism 09/20/2013:

It is hard to imagine how an exit could make matters any worse. Greece would get the Eurozone boot off its neck, be able to deficit spend to get its idle resources back to work, and depreciate its currency to make its goods more attractive on world markets.

So why are the periphery countries suffering this level of unproductive pain? Because the countries aren’t making the decisions. It’s powerful local politicians who are selling out their countries, working in cahoots with Eurozone technocrats. And I can assure you none of them are sharing in the suffering of periphery country workers.

This is the plague of our modern social order: detached and corrupt leaders, whether intellectually, monetarily, or both. The old code of noblesse oblige, which at lead required the elites to have some concern about what happened to the lower orders, is a dead letter.
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