Wednesday, 15 August 2012

Welcome Recession

Yesterday, Eurostat published a news release concerning the GDP data of the Eurozone countries, compared to last year's. Not surprisingly, the results were that Greece's output shrunk by 6.2%, Spain's by 1%, Cyprus's by 2.4%, Italy's by 2.5% and Portugal's by 3.3%. Even in the UK, output was reduced by 0.8% compared to 2011. The only surprise was France, which avoided recession (which is measured as two consecutive quarters of negative growth) by reporting a 0.0% change compared to the previous quarter.

Germany's GDP on the other hand, rose by 1.0% a change attributed mainly to an increase in exports and domestic consumption, as investment levels have fallen. In general, GDP dropped by 0.2% both in the EA17 and EU27, while in the previous quarter it had remained stable at 0.0% change. What does this mean? Well essentially, if the next quarter is one of negative growth, the EU will officially be in recession. And I am almost certain that there will be negative growth in the next one.

That is, unless Mario Draghi (or any other EU official) decides to do something about this. By something, I mean effectively use his power as the ECB governor and buy bonds directly, which would boost investment and restore confidence in the region, something that he directly stated that the ECB could do in the future. I hope that Mario Monti's statement that "we have to reach the night before the euro collapses in order for the ECB to do what it has to do" proves to be wrong. I really hope that the officials will come to their senses before it is too late and large-scale measures to save the Eurozone have to be devised. 

Nevertheless, I do think that another quarter of negative growth, moving the EU in the recession zone, will be their wake-up call. We are humans, and like human beings most of us have do not care as much about the future as we do about the present (talking about German policies here; to be accurate it's just Merkel policies as many in Germany oppose her actions). In order to change ideas and mentalities we have to be convinced that things are going bad. Entering a recession will do that kind of convincing.

It seems that "smart" people need to wait until the very last minute to be convinced that their policies have created more chaos rather than reconstructing the Union. That is why an EU-wide recession is needed and, unfortunately, we are going to get one. Just wait until the next quarter.

P.S. The only person acknowledging what the bailed-out countries have done is Olli Rehn in one of the best articles I have read about the Eurozone. One cannot wait until September Olli, in order to see whether the ESM will be able to recapitalize banks directly.

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