The Eurozone economy will not cease contracting for the immediate future. The steady rise in confidence witnessed from November to February was in part caused by rosy official forecasts for economic growth being parroted by the mainstream media. The Eurozone is simultaneously cutting government spending and business investment while consumer spending continues to decrease in lockstep with employment.
Exports, the proposed savior of every country caught within an economic and fiscal crisis, cannot substitute for the steep contraction in every other GDP component. The growth in exports occurring in periphery countries in unsustainable in a world where the Eurozone’s largest markets are either shrinking or not expanding rapidly enough to boost demand.
Investors are riding high in April and may take profits to avoid getting shot down in May. The Fed’s plan remains the same: giving cheap money to TBTF banks to pump up asset prices in the hopes that a wealth effect revives the economy. Nothing can be allowed to spoil the party, so the Fed must telegraph its intentions without explicitly stating them. Hilsenrath’s job is to make it clear to market participants that the Fed will continue spiking the punch bowl to make sure everyone keeps dancing.
This policy will not stop, because a market correction will return the weak economy to stagnation or even a recession. The low official inflation rate, which omits asset prices from its calculation, gives the Fed cover to continue the policy.
Germany realized that its was heading down an unsustainable path, so it loosened its labor markets and adjusted its social programs. France did not and has learned nothing from the Teutonic example on the other side of the Rhine. Rather than rethinking its social and economic model, France is becoming more extreme in its views. As its economy sinks so does its influence, making the EU a weaker institution dominating by Germany.
Germany cannot save the Eurozone by itself, but a strong France and Germany standing side-by-side has a chance. Alas, with the increasingly harsh rhetoric coming from Hollande’s socialist camp, French reform prospects are close to zero.
The mainstream media’s definition of progress apparently has something to do with shuffling papers back and forth between the three head of the troika and the Greek government Real progress, as in a growing economy, seems years away.
Italy is now paying record low yields for issuing debt. Yet, by the day the chances that it will ever be able to pay this debt back dwindle. Tax revenues continue to shrink with GDP and employment, and increasing NPLs virtually guarantee some sort of bank bailout within a year or two. Where will Italy obtain the money to recapitalize its banks? (Hint: Cyprus)
Poor economic performance is bad for a nation’s health. The problem with budget cuts is that programs promoting the health of citizens are cut in favor of military spending, which has powerful political backers. Greece is an excellent example of this dynamic. The country has cut malaria prevention programs like mosquito spraying and has witnessed malaria outbreaks unseen since the 70’s.
The military budget is mostly intact, which is a good think. Xerxes and his Persian armada will think twice before invading Greece.