Tags: eurozone | Italy | elections | GDP

Things Still Have to Get Worse Before Getting Better in Europe

Tuesday, 11 December 2012 10:47 AM Current | Bio | Archive

Notwithstanding an apparent calm, at least for now, on both sides of the North Atlantic, it’s unfortunately politics that seem be building, once again, their very particular respective strangleholds on where the economies of the United States and the eurozone could be headed.

In the United States, it’s the policymakers in Washington with their discussions on the fiscal cliff that could stimulate or seriously weaken, if not break, the ongoing, but still too fragile, recovery during the 20 days (13 ½ trading days) that are left before 2012 is over.

Besides that, there is still the debt-ceiling extension that has to go up from the actual $16.4 trillion that will debated probably close to, and hopefully not past, its deadline, which should be somewhere between mid-February and the first half of March.

Both events by themselves or in combination have the capacity of sending extremely serious (destructive) jitters through the markets. Long-term investors should remain on alert for both of them and certainly not get confident (complacent) until everything is agreed upon and settled in a clear and transparent way.

Keep in mind that if anything goes substantially wrong on debt/deficit reduction and raising income, e.g., by tax reforms, it cannot be discarded that one or even more credit agencies could downgrade the United States in 2013, which could bring upward pressures on U.S. interest rates and thereby disturb the Federal Reserve’s objective of keeping interest rates artificially low for the foreseeable future. The last thing the United States needs now is a re-run of what happened in the summer of 2011, when policymakers in Washington went too closely to the debt/deficit cliff before they agreed on the debt-limit and deficit-reduction at that time.

On the other side of the Atlantic, we can’t even talk about a recovery, as the eurozone is in a recession as a whole. Third-quarter gross domestic product (GDP) for the euro area contracted 0.1 percent after contracting 0.2 percent in the second quarter, while third-quarter GDP increased 0.1 percent in the eurozone after also contracting 0.2 percent in the second quarter. In comparison, third-quarter GDP in the United States increased 0.7 percent after growing 0.3 percent in the second quarter.

The Organization for Economic Co-Operation and Development’s composite leading indicators (CLIs) indicate that growth in the eurozone continues to be weak and well below trend, coming in at 99.3 relative to 100.2 a year ago. In contrast, the United States is experiencing firming growth, as shown in its CLI of 100.9, compared with 100 a year ago. For Italy, which is in a depression, the October CLI came in at 99, compared with 100.6 a year ago. (CLIs are designed to anticipate turning points in economic activity relative to trend and show diverging patterns across major economies.)

Over the last few days, the ongoing crisis in Italy, which is the third-largest economy in the eurozone, has come back on the forefront after Italian Prime Minister Mario Monti announced he would step down after the vote on the budget, which is expected before Christmas. This also coincides with former Prime Minister Silvio Berlusconi announcing he is coming back to the front stage of Italian politics and will fight the next election campaign in February.

Everyone knows that Berlusconi gave a show of usefulness and comics (?) during his last period as prime minister. What is less known is that since he left office, he has made very straightforward but also spot-on analyses of the Italian crisis. He says that Italy needs a new eurozone deal. The European Union imposed austerity measures are not working. GDP has now been contracting for five quarters in a row, and the economy is going from bad to worse. Italian business lobby Confindustria just revised its 2013 GDP estimate down to -1.1 percent from -0.6 percent. Also unemployment continues to rise and stood at 11.1 percent in October from 8.4 percent in 2011.

Berlusconi also said that Italy leaving the euro should not be treated as taboo. By the way, he has taken such an attitude before when in 2005 he adopted an embarrassing anti-euro stance, when he called the euro a disaster and that Romano Prodi’s euro, who was then EU Commission President, had been a rip off that had screwed everybody. He also said, “We no longer have our own currency so we no longer have the possibility to devalue.” As we all know, devaluations can help counties to come out of depressions.

No doubt that Berlusconi will campaign on an anti-austerity platform. I don’t expect him to become prime minister again, but he could well prevent the next Italian government of having a majority that’s absolutely needed to continue the reforms that Monti has put in place. From now until at least the Italian elections in February, we can expect turbulence, more uncertainties and substantial contagion risks to countries like Spain.

Yes, the outlook for Italy, but also for all of the eurozone states, could definitely be much better. I’m afraid in Europe things will still have to get worse before getting better.

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Notwithstanding an apparent calm, at least for now, on both sides of the North Atlantic, it’s unfortunately politics that seem be building, once again, their very particular respective strangleholds on where the economies of the United States and the eurozone could be headed.
Tuesday, 11 December 2012 10:47 AM
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