Eurozone: New data show recession and debt closer to explosion

Press conference by Olli Rehn, Vice-President of the European Commission on the spring economic forecasts, (EC Audiovisual Services).

Yesterday the world was informed that Eurozone is stuck into recession, after the Eurostat, the EU statistical service, announced that the euro area GDP receded once more during the first quarter of this year. However, this was not news for those who follow closely what is happening in the single euro money zone. Only some days ago Eurostat had released information on the developments in the front of business investments and profits during the last quarter of 2012. Data showed clearly a negative turn. Quite predictably a fall in investments and profits is almost instantly translated into losses of production and incomes during the next quarter.

According to data released by Eurostat, the investment rate was 19.6% in the fourth quarter of 2012 compared with 19.7% in the previous quarter in the EU of the 27 member states. These data come from a detailed set of seasonally adjusted quarterly European sector accounts produced and released by Eurostat and the European Central Bank (ECB).

Falling profits

As for the business profit share, it fell once more both in the EU27 and the euro area. According to Eurostat, “in the EU27, the business profit share was 37.3% in the fourth quarter of 2012, compared with 37.6% in the third quarter of 2012. In the euro area the profit share was 37.7% in the fourth quarter, compared with 38.0% in the previous quarter”.

All those negative statistics are not new for Europe. Independent sources estimate that Eurozone was in recession for at least 18 months to March 2013. Given that short-term indicators are also negative, it is more than certain that the negative trends are still present in this second quarter of the year. On top of that the President of the European Central Bank, Mario Draghi, in a recent Press conference where he announced the reduction of ECB’s basic interest rates, said that Eurozone expected to recede this year and estimate the fall of production and incomes at 0.5% of the GDP.

If nothing changes on policy level, Eurozone is not expected to return to sustainable and noticeable growth in the foreseeable future. Even the strongest economy of the area, Germany, is currently entering in a stagnation period. Given that the entire South of the Old Continent is constantly losing large parts of its production and incomes and France is in negative grounds for months, there is no light at the end of the tunnel. Even Holland is now in recession.

Good news from capital markets

As for the latest positive developments in the capital markets, with the falling interest rates and the growing investor confidence vis-à-vis the debt paper of countries like Greece, Italy, Spain and Portugal, this has to be explained by the growing belief that Eurozone is not to break up. It is just a financial market change of attitude, which only remotely can help growth under more aggressive policy measures. In reality investors are convinced that the ECB will not let the debt paper of the over-borrowed Eurozone countries collapse. This means nothing however for the real economy because it just helps those countries to recycle, if not increase, their debts. Moreover market can change their attitude easily with the first cloud in the blue Mediterranean sky.

Coming back to Eurostat, its yesterday’s announcement was quite discouraging for the short-term future of Eurozone, let alone the long-term misty horizon. The EU statistical service says that the “GDP in the euro area (EA17) fell by 0.2% and by 0.1% in the EU27 during the first quarter of 2013, compared with the previous quarter, according to flash estimates. In the fourth quarter of 2012, growth rates were -0.6% and -0.5% respectively”. The fall was understandably much larger on an annual base. Compared with the same quarter of the previous year, Eurostat found that, the “seasonally adjusted GDP fell by 1% in the euro area and by 0.7% in the EU27 in the first quarter of 2013, after -0.9% and -0.6% respectively in the previous quarter”.

All in all there is not one economic analyst predicting that Eurozone can return soon to growth which can be felt in the labour market, under the current policy conditions. Alas the prediction that the single money zone can probably just reverse the fall of its incomes and production some time in 2014, will not be enough to even stop the unemployment rates for growing.
If the betterment in the financial markets, which offers a good reduction of debt service, is not seen as an opportunity to relax the severe austerity imposed all over Eurozone, the debt will suffocate an always receding economy. If the drop in the debt servicing cost proves not enough to revitalize the economies, then more borrowing will prove inevitable. That will prove a critical moment and markets will probably stop supporting the increasing Med debt, including France.

Not to forget that even during the past two crisis years, with interest rates in the South of Europe occasionally reaching not sustainable levels, sovereign debt kept increasing. In short, either way the volume of debt which seems already rather unsustainable will inflate further and call for a good haircut at least on the debt paper held by other sovereigns or central banks. As a result, a haircut may appear unavoidable and only growth can sweeten its bitter taste.