“Euroland is experiencing an economic event more akin to the Great Depression than to any business cycle we have seen in our lifetimes,” Carl Weinberg, chief economist at High Frequency Economics, said.
Figures released last Thursday showed the eurozone economy contracted, dragging the economies of emerging Europedown with it and despite better-than-expected growth in France and Germany.
Weinberg noted that the eurozone’s GDP has fallen in three of the last four quarters and it never really recovered from the 2008-2009 fall.
“Industrial output was higher 12 years ago than it was last month” and “it has not yet come within 10% of its 2008 level,” he pointed out, adding that unemployment is at a record high of 11.6% and rising, while money and credit keep contracting month-to-month.
“We expect this prolonged and deep downturn, which is already in its fourth year, to continue,” Weinberg said. “By the time it is over, we expect to see deflation and even higher unemployment, with social and political unrest as a consequence.”
The recent spat between the European Union and the International Monetary Fund over how to sort out Greece’s problem has reignited fears of a break-up of the eurozone.
Nouriel Roubini, also known as “Dr. Doom” for his gloomy economic scenarios but praised for having correctly predicted the 2007 financial crisis, said last week during a conference in the German city of Mainz that frontloading on austerity policies could “turn the recession into a depression,” according to German media.
Roubini also said that eurozone periphery countries need 20% to 30% depreciation of the euro’s exchange rate and that the downturn threatened to spread from the edges to the core of the single currency’s area, with France sliding towards recession.
‘NOT A NEW PROBLEM’
But not all economists are as gloomy.
The eurozone’s GDP “fared slightly better than expected” in the third quarter and last week’s signals from the eurozone were mixed, Gudrun Egger, head of research at Austria’s Erste Bank, said.
“The GDP growth of -0.1% vs. the previous quarter implies that the eurozone has entered a technical recession – but a still mild one for now,” Egger added. “We expect – in consonance with weak leading indicators – a slightly negative fourth quarter. This translates into full-year growth of -0.4% (2012) and 0.4% (2013) for the eurozone.”
On France, Michala Marcussen from Bank of America Merrill Lynch said that the bank’s analysts had “less concerns on the budget targets and only look for a modest overshoot in 2013” as interest rates were moderate and public sector governance was strong.
“Recent initiatives offer hope that the government is recognizing the need to make significant changes to the French economy,” Marcussen added.
Ultimately, the eurozone’s economy is constrained by the credit crunch that began four years ago, Weinberg said.
“It continues today, as declines in the valuations of sovereign bonds lead banks to worry about capital adequacy,” he added. “No economy can grow without an accommodating increase in money and credit.”
However, Weinberg noted that the euro crisis, if it continues as a “slow grind downward,” will not cause any “big bang” events that would jolt markets in the short term.
“We expect little incremental impact as the crisis matures: euroland’s depression is a fact for the global economy, not a new problem,” he said.