Corollary to the 1st and 2nd Iron Laws of the Eurocrisis

The 2nd Iron Law counsels us to ignore the politicians and focus on the numbers, but the 1st Iron Law tells us that the politicians, who are in charge of the bureaucrats figuring and reporting the numbers, will lie when things get serious. What are we to do?

Follow the Corollary to the 1st and 2nd Iron Laws:

Economic and fiscal forecasts issued by any Eurozone government or any of the alphabet soup of European Union organizations will paint a far rosier picture than the data warrants. Discount them accordingly.

It will only take a few examples to prove the corollary. Here is a chart detailing the troika’s GDP forecasts for Greece versus reality courtesy of ZeroHedge:

The dark line is the actual trajectory of Greek contraction and the dashed lines are the forecasts for 2008 through 2012. Note that each forecast year after year becomes more optimistic so that the troika can claim that the Greek debt to GDP ratio is becoming more sustainable. The last forecast does not even acknowledge that Greek GDP will continue to plunge as the line begins rising immediately from the time actual data stops.

Next let’s examine  the history of Spanish and Greek budget deficit forecasts:

Spanish and Greek Budget Deficits copy 2

Are you confused? That’s the idea. Let’s continue with Greece. The Greek actual budget deficit is the dark blue line lower than the others. Compare it with the red line, a 2010 forecast, and the green line, a forecast current before everyone admitted a 3rd bailout was needed.  When the first forecast was discovered to be wildly optimistic, the troika issued another one that turned out to be, well, wildly optimistic. A another forecast has been issued that makes it appear that Greek debt will finally begin dropping, but I have a feeling that a 4th Greek bailout will be necessary by the summer.

Now, focus on the purple and baby blue lines. The purple is Spain’s actual deficit and the baby blue the forecast. See the difference between the two? The Spanish forecast has been revised since I created this chart in October. The 2013 deficit will be 5.3% according to the Spanish finance ministry, but based on the slope of the line it should be closer to 7.5% when all is said and done.

When you read articles in the mainstream media proclaiming that Europe is on the right path, remember that unrealistic projections just make it seem that way.

 

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