Reuters Proclaims This Time is Different in Eurozone

Analysis: Greek deal puts euro zone in slow recovery room | Reuters.

The temporary abatement in the eurocrisis has led to a boom in articles following the European recovery meme. I have already profiled similar pieces from the Financial Times and Bloomberg, so today it is Reuters’ turn.

The author writes that the eurozone is in the recovery room now that the danger of a Greek default has been averted for a couple of years. This statement has no basis in fact and is merely wishful thinking from the mouths of the can-kicking politicians.

The time between the 1st and 2nd Greek bailouts was 23 months. This shrank to eight months between the 2nd and 3rd bailouts. Hockey stick revenue and growth projections make it appear that Greece is in the clear for another two years, but we have been down this road before.

The free fall in GDP, employment and government revenues shows no signs of abating. Merkel will be lucky to make it through elections in the fall of 2013 without the Greek situation flaring up again.

Next, we have some optimistic speculation that foreign trade will lift the eurozone’s fortunes:

The currency area’s escape route hinges more on the pace of expansion in the United States and China, lifting the world economy, than on the policy mix in Europe, which will continue to favor austerity over growth in 2013.

Let us enter the land of math to show why healthy export growth will not lift the eurozone out of recession. Combined trade between the eurozone and the U.S. and China is running at about a €521bn annual clip. A healthy 10% rise in exports to these two countries would add 0.04% in growth next year.

Inta-eurozone activity accounts for 80% of its GDP. What that means is a mere 1% fall in this measure decreases GDP by €104 or 0.8%. Hence, even a nice rise in exports will not offset the declining GDP caused by the austerity policy mix.

The author then envisions a best-case scenario for Portugal and Ireland:

At best, Ireland and Portugal could emerge slimmed down from their bailout programs and regain capital market access by the end of the year, demonstrating that adherence to a tough fiscal adjustment plan can work.

This speculation is simply not supported by the facts. Irish GDP began shrinking again after a tepid recovery dropping at an annual rate of 1.1% last quarter. Irish unemployment has remained stagnant between 14.7% and 14.8% for the last year.

Portugal is in worse shape. Its GDP has been shrinking since the beginning of 2011 and its unemployment has reached 15.8% after rising a spectacular 16 of the past 18 quarters or four and half years of decreasing employment.

Based on the actual economic numbers from these two countries, there is no basis for predicting a return to capital markets within a year. Since these facts do not support the meme, they are ignored.

Another common theme in these memes is the use of optimistic statements by politicians and bureaucrats for support. Remember the 2nd Iron Law of the Eurocrisis— ignore the politicians, and focus on the numbers. As you have read so far, the numbers suck.

These types of articles always spin a bunch on of eurocrats sipping wine and discussing a banking union for a few hours a week as “progress:”

In the meantime, modest progress is likely on creating a single European banking supervisor, the first step towards a euro zone banking union, but without a joint deposit guarantee to deter capital flight and bank runs.

You may have some nice statements to mollify markets, but if there has been no discussion on how to pay for a joint depository scheme or the resolution of insolvent institutions, then you do not have a banking union:

The main issue holding up the banking union is that the FANG countries, led by the G, will never agree to be jointly and severally liable for all of those dodgy periphery banks, especially when they have their own dodgy banks to worry about. A full banking union will never happen.

Somehow, up is down, and bad is good in euroland when it comes to the recovery meme. The author believes that Spain requesting a bailout would “reassure markets.” Actually, this request would mark the beginning of the end of the eurozone. Just like Greece, Spain is a black hole.

Its funding needs for next year are severely underestimated at €230bn. With €159.2bn in maturing debt of all kinds, the funding estimate implies a budget deficit of only €70.8bn or 6.3% of GDP. That figure would be its best showing since 2009 before the property market and economy had totaly collapsed and would represent a decrease of 3.1 points from this year’s deficit of 9.4%. Spain has entered the Greek zone where budget deficit estimates are routinely missed amid crippling budget cuts.

With cratering employment and GDP figures and corresponding decreases in government revenues, a more likely figure for next year’s deficit is 10%, which yields €270bn in funding needs. And, we haven’t even accounted for the bank bailout, regional financing needs or this year’s unfunded budget deficit. Spain’s failure will start the endgame, though markets may post a meaningless rise before that happens.

Are you keeping track of all of the highly unprobabilistic events that must occur for the Eurozone to begin recovering in accordance with the meme, because there is one more. The author dismisses French troubles because there is a belief that French bonds have an implied German guarantee. This misconception is really a version of the “external guarantor” belief  that circulates when a market is frothy. It is no different from the Bernanke or Greenspan put in the equities markets.

I remind you that even if Germany wanted to bail out France, it could not afford to. France is almost as large as Germany, and if France came under attack, Germany would already be busy with Spain and Italy.

The best part of the article is a French economist claiming that eurozone debt will become desirable in the next few years as other large economies attempt to inflate away their debts:

Only euro zone debt will remain strong blue debt because the great German legacy is that we won’t inflate. So part of our debt is going to default, and the rest will become the crown jewels of world debt.

This line of thought ignores the fact that the ECB has grown it balance sheet at a faster rate than the other large central banks since the onset of the GFC in 2008. If the ECB is not monetizing debt, then what exactly is it doing with its LTRO, OMT and SMP policies where it either buys bonds or loans money against them at a rate lower than yield on the instrument?

The author closes the article with this statement:

The euro’s survival may no longer be in much doubt after the ECB stepped in and the Germans decided to keep Greece inside the currency area, but the euro zone faces at best a slow grind back up the hill.

He’s right. The euro’s survival may no longer be in much doubt, but that is only because it is in grave doubt. The facts point to continuing economic contraction. Europe is quickly running out of money to fight the crisis and the day of reckoning is becoming closer and closer. Until the endgame commences, expect many more “Europe is recovering, and this time is different” articles.

2 thoughts on “Reuters Proclaims This Time is Different in Eurozone

  1. I think there may be a hitch in your numbers. I have the Eurozone GDP at ~13.4 trillion Euros. 0.4% growth on this is ~524 billion Euros. Your trade number for the US and China looks correct. If so, 10% growth in bilateral trade with the US and China would increase EZ GDP 0.04%, or a factor of 10 less. Either way, they are dreaming.


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