The Eurozone’s “Nascent” Recovery

By William K. Black

On January 19, 2014 I posted a column entitled “Deflation: The Failed Macroeconomic Paradigm Plumbs New Depths of Self-Parody” that discussed the insanity of the Eurozone’s approach to “the threat of deflation.”  The EU’s troika cannot understand that deflation is produced by inadequate demand and that the way to prevent it is to use fiscal policy to fill the gap in demand rather than waiting for deflation to hit and then trying to check it through “quantitative easing (QE).”

My January 25, 2014 column (“Spain Rains on Rehn’s Austerity Victory Parade: Unemployment Rises to 26%”) explained how a few weeks after the troika cited Spain as its success story proving the wisdom of austerity, unemployment in Spain – already above Great Depression levels – increased to 26%.

The Eurozone has decided to ring out January with more bad news about the economy, but the New York Times and the Wall Street Journal both end their articles with claims that things are actually going pretty darn well.

The NYT refers to the eurozone “recovery” as “nascent.”

Nascent: “just coming into existence and beginning to display signs of future potential.”

The reality of both news reports is that that they show that “recovery” belongs in quotation marks and that what the data actually “display” are “signs of future weakness.”

First, there was no improvement in the Eurozone unemployment rate and the unemployment rate is at Great Depression levels.  Digging out of an unemployment hole that deep requires substantial, consistent economic growth.

Second, inflation is far below the (tiny) figure the European Central Bank (ECB) was purportedly targeting.  It is falling and the “threat of deflation” grows closer.  The troika claims that deflation does enormous damage.  The NYT characterizes them as concerned “that Europe might be headed toward a Japan-style deflationary quagmire.”

Third, the EU has no intention of using fiscal policy to boost demand substantially.  (Virtually every Eurozone nation runs a deficit, but they are not allowed by EU rules to run adequate fiscal programs.)  The troika is still enthralled with austerity according to the NYT and the WSJ accounts.  It intends to wait until the nations of the Eurozone’s periphery, already suffering from Great Depressions (NYT), to descend into a “Japan-style deflationary quagmire” (that lasted the worst-part of two decades) before it acts.  The WSJ states that the troika is concerned that deflation will “be highly damaging.”

Even when the troika finally acts against deflation after it sets in, the WSJ indicates that it intends to rely solely on monetary policy, which few economists believe is effective against deflation, rather than fiscal policy.  With no sense of irony or pathology, the WSJ reports that even when deflation occurs the ECB will face opposition from German if it tries to use monetary policy to counter deflation because such a policy “stokes fears of inflation.”

Fourth, the NYT reports that combining fiscal austerity and low interest rates ECB loans has been a miserable failure.

“The E.C.B. reported on Wednesday that growth in the broad money supply, known as M3, fell to 1 percent in December from a 1.5 percent pace a month earlier, while loans to the private sector shrank by 2.3 percent from December 2012. Those numbers indicate that credit is not reaching the real economy — despite the central bank’s ultralow interest rates and other extraordinary measures to support the economy.”

That kind of fall in bank lending during the “recovery” phase is very bad news.  Banks aren’t lending because corporations believe that consumer demand is inadequate to buy increased goods.

Fifth, the NYT column shows that Germany is reporting data indicating inadequate demand.

“A report Friday from the German Federal Statistical Office showed that retail sales in Germany fell sharply in December, dropping 2.5 percent, after a 0.9 percent rise in November.”

The WSJ adds that consumer purchases fell slightly in France.  The two largest economies using the euro are suffering from falling consumer purchases.

Sixth, the “good news” that the NYT hypes (“industrial activity in the euro zone was at its highest level since mid-2011”) is bad news.  That increase in industrial production should have been a substantial boost to the economy.  The fact that it did not does so implicitly confirms that consumer demand was deeply inadequate and counterbalanced the growth in industrial production.  If the euro appreciates and/or consumer demand continues to fall in Germany and France, it will be difficult to maintain those industrial activity levels.

Seventh, the good news that the WSJ hypes (“the number of people without jobs fell by 129,000”) is likely to be even worse news.  As with the U.S., very large numbers of Europeans are leaving the labor force.  Because they have given up looking for jobs they are no longer “unemployed.”  Unlike the U.S., the Eurozone is suffering from severe migration.  This is particularly true in the nations of the periphery.  In these nations it is becoming the norm for college graduates to emigrate.  That bodes badly for future Eurozone growth.

Eighth, the “nascent” “flight to quality” triggered by very bad economic troubles in Argentina, South Africa, and Turkey combined with increasing worries about China could make the troika’s already impossible strategy of turning every EU nation into a net-exporter fail more spectacularly.  If the problems persist the euro’s exchange rate will appreciates relative to most nations (other than the U.S.), reducing EU exports.


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