Debunking the Hype about the European “Recovery”

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.

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  1. Ben Johannson

    The next demand shock will send those countries into a renewed contraction. It’s a matter of time..

    1. lakewoebegoner

      the next demand shock is already here…..high gasoline prices (> $4.25 in my neck of the woods, and past 2008 levels).

      and mortgage/consumer credit debt/GDP levels is a problem all around the western world even in “role model” non-Anglo countries like Korea and the Netherlands.

  2. Swedish Lex

    There is some noise from Germany and Italy saying that Merkel would be prepared to accept to grant more time to countries like France and Italy get within the stupid 3% rule. Even the Germans may start to understand that the far right is on the march in Europe again and that it just may have something to do with the response to the crisis that they have imposed on Europe. But I am not holding my breath.

    The ruling French political class is totally stuck in panic mode since they cannot devalue, which is what they really would like to do, and since they have zero leverage on the Germans.

    We are all waiting for the ECB to print more. I guess that the only question that really matters is to what degree Draghi can manipulate the Bundesbank to agreeing to more printing. My own guess is that it took him a year to get the Bundesbank to the point where the ECB took its latest rate decision a few weeks back.

      1. Swedish Lex

        Yes although they in my view increasingly secretly wish for Draghi to do the dirty work for them by blowing up the eCB’s balance sheet, officially hating it in public.

      2. formula57

        The trajectory of the Euro currency project was predicted from the outset by a number of people and it is inconceivable that the Bundesbank did not have an awareness of and fully understand those predictions even if (as is perhaps not so likely) it did not share them. The interesting question then arises of what did the Bundesbank expect to happen at this stage and beyond and why, whatever it expected, did it suppose that would turn out to be good for Germany or, if bad, why did it allow the Euro project?

        1. digi_owl

          Could be that they found it favorable to the German economy compared to the earlier system of pegged currencies. This because the pegs allowed the other economies to stay in some kind of relation to the German one, without the German industrial machine fully flattening them.

          Not really that different to the peg between USA and China, except that China has been allowed to match/overtake USA industrially.

          Then again i could have sworn that something like the EU system is what Bismarck used to form the modern German state out of the mishmash of smaller ones in the region.

    1. Michael Hudson

      A great speech. Note also that she’s by far the best dressed politician in Europe.

    2. Peter Pan

      Hell, yeah! Great speech.

      I’m sure that adding Ukraine and Moldova via an EU association agreement as well as imposing sanctions on Russia will do wonders for the EU economy. NOT!

  3. fresno dan

    What a plethora of especially great articles and links today!

    In our superficial media centric world, its all Frame, all the time.
    The fact that manipulated interest rates are covered, while continuing unemployment, rising poverty and suicide are not tells you everything you need to know about what the elites want you to know.

  4. Francesco

    European countries import almost 100% of their fossil energy that is at least 2/3 of their energy. They depend on Russia for 30% of their oil imports and while there is a theoretical possibility to find other sources for natural gas albeit at a much higher price, there is no possibile replacement for russian oil which by the way is peaking and will start to decline fast before the end of this decade. Instead of start a massive campaign of public spending to enable a possibile (but difficult) transition to the post carbon, europeans embarked in austerity and a cut of public and private investments on anything useful, redirecting all resources in saving a bankrupt banking system. If I have to think about european countries in 2030 I think they will be like Kosovo today, can’t imagine in 2050.

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