Just because periphery county bond yields are down thanks to the tender ministrations of the ECB does not mean that Europe is on path to a recovery. And in a even clearer-cut case than the US, a technical recovery (as in hitting a bottom and showing some improvement from that) is a terribly pale shadow of the real think.
A new and suitably data-driven post by Zsolt Darvas and Pia Hüttl at the Bruegel blog throws cold water on the notion that Europe’s hardest-hit economies are on the mend. The key section:
Do these undoubtedly benign developments suggest that the three euro-periphery countries [Portugal, Greece, and Ireland have reached a sound and robust fiscal situation? Unfortunately, the answer is no….On the one hand, our findings continue to suggest that the public debt ratio is set to decline in all three countries under the maintained assumptions and in fact their future levels are now projected to be slightly lower than in our February simulations (eg for 2020 our new results are 2-3 percent of GDP lower). But on the other hand, the debt trajectories remain highly vulnerable to negative growth, primary balance and interest rate shocks, especially in Greece and Portugal, though also in Ireland.
For example, if nominal GDP growth turned out to be 1 percentage points lower than in our baseline scenario (either due to weaker real growth or lower inflation), Greek public debt would still be 133% of GDP in 2020 and 113% in 2030, the Portuguese debt ratio would be 119% in 2020 and 106% in 2030, while the Irish debt ratio would be 107% in 2020 and 87% in 2030…
Under the combined shock of 1 percentage point slower growth, 1 percent of GDP smaller primary budget surplus, 1 percentage point higher interest rate and 5% of GDP additional bank recapitalisation of the banking sector by the government (which is not an extreme scenario), the debt ratio would explode in Greece and Portugal and stabilise at a high level in Ireland (Figure 2).
Furthermore, we highlight that our goal with the debt simulation was not the calculation of a baseline scenario which best corresponds to our views, but to set-up a baseline scenario which broadly corresponds to official assumptions of the IMF and the European Commission and current market views….
We think that today’s markets may be overly optimistic…ill remain a challenge when there is an austerity-fatigue in most periphery countries. Also, the weak euro-area growth and too-low inflation do not favour debt sustainability of the euro-periphery.
Wolf Richter points out that even Centre for Economic Policy Research, which officially dates recessions for Europe as a whole (but not for particular countries), remains loath to call an end to the downturn that started in the last quarter of 2011. From his post on the “recovery”:
In 2013, all sorts of organizations and political figures came out to declare an end to the recession….So in October 2013, under pressure….the CEPR Committee decided to meet in Paris to determine if there was indeed enough evidence to call an end to the recession. But on October 19, the Committee released its findings: “while it is possible that the recession ended, neither the length nor the strength of the recovery is sufficient, as of 9 October 2013, to declare that the euro area has come out of recession.”
That was bad enough. But it left room for hope. Maybe more evidence would soon tip the scales…
Alas, after meeting once again, this time in London, the Committee just now slashed those hopes (and even used bold print to do it):
The Committee observed that since early 2013 the euro area has witnessed a prolonged episode of extremely weak growth in economic activity: Euro area GDP has risen by less than 1% from 2013Q1 to 2014Q1 and labour markets have shown little change over that period. Had the improvement in economic activity been more significant, it is likely that the Committee would have declared a trough in the euro area business cycle in early 2013, most likely in 2013Q1. The lack of evidence of sustained improvement of economic activity in the euro area does, however, preclude calling an end to the recession that started after 2011Q3.
Then the Committee came up with a new twist to express the mysteriously eternal nature of the Eurozone recession, once again in bold: “the euro area may be experiencing since early 2013 a prolonged pause in the recession that started after 2011Q3.”
Yves here. Ouch.
Another way to look at the European cheerleading is that the officialdom is trying to bring the confidence fairy back to life. But this continued reliance on smoke, mirrors, and misguided austerian ideology is looking more and more like cargo cultism than sound policy.