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European Economy Sinks into Decline

The emerging recession continues in the Eurozone, as GDP contracted by 0.2%. The loss was slightly smaller than expected, but that’s something of a double-edged sword. The economy grew in Germany but dropped in more struggling areas like Italy, Portugal, Spain and Greece.

This means that one governing authority must apply a unified monetary policy on a widely divergent region. In addition, Germany has less incentive to change their insistence on fiscal tightening in the struggling countries. If all the countries in the Eurozone fell, the idea of a wrong path on the economy could more easily take hold.

But we’re actually on that path. The slowdown in Q2 does herald a coming Euro-wide recession; because Q1 growth in the zone was flat at 0.0%, technically speaking the recession isn’t already underway, though it’s happening and serious in several of the Euro countries already. And Germany, while still improving (up 0.3% in Q2), is slowing down as their trading partners sink. Most of Germany’s growth came from exports, and economic analysts predicted, based on indicators like a reduction in factory production, that growth would slow in the balance of the year. Meanwhile, France remained flat at 0.0% for the third straight quarter. European GDP statistics are not annualized, so they look smaller than US figures, which annualize them.

Even northern countries like Belgium and Finland saw growth fall, in the case of Finland by a scary 1% in the quarter. This could explain the boomlet of the “Fixit” talk, in which Finnish leaders threatened to leave the euro, earlier in the summer.

Greece continues to be a basket case, with a massive 6.2% drop in GDP in the quarter, year-over-year. The troika (the EU, ECB and the IMF) will make a decision on whether to keep funding the Greek bailout in September.

This is the real crisis in Europe. Concerns about the debt problems have led to an austerity response that is just destroying these peripheral economies and weakening others. In addition, as GDP drops along with tax receipts, the debt to GDP ratio only grows. Austerity in a recession doesn’t even work on its own terms to cut deficits.

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David Dayen

David Dayen