THE FOLLOWING IS AN EXCERPT FROM DR. RASMUS’S JUST PUBLISHED ARTICLE in teleSUR, ‘On the Edge of Another Global Recession?’
Last week, initial government released data for the 2nd Quarter 2014 showed the Eurozone economy coming to a complete halt. Germany’s economy—which represents a third of the Eurozone’s total GDP—declined by 0.2%, the first such contraction since 2012. So did Italy’s, while France recorded no growth at all for a second consecutive quarter.
The zero growth for the combined 17 Eurozone economies follows a near stagnation 0.2% growth in January-March. The January-June trend therefore strongly suggests a recession is now emerging in the core European economies—the third such in the past five years.
Europe’s first recession occurred in 2008-09 as it collapsed with the rest of the global economy. It then experienced a historically weak 0.5% economic recovery in 2009-10, only to fall back into another second recession in the subsequent 18 months that wiped out the prior meager 0.5% gains. 2013-14 thereafter saw an even weaker recovery of only 0.2%, and for an even shorter period, which is now being reversed once again.
The Eurozone arguably has never really recovered from the recession of 2008-09. The short, shallow recoveries of 0.5% and 0.2%, which have become progressively shorter and weaker, do not represent a true recovery. Europe has simply been “bouncing along the bottom” economically now for five years—stagnant at best and slipping in and out of recession.
An important new trend in the Eurozone’s now emerging 3rd recession is that the economic contraction is driven by the Eurozone’s key economic engines—Germany, France, and Italy—and not just its weaker economies on its southern and eastern periphery, as was the case in Europe’s second recession of 2010-12.
Together the three economies—Germany, France, Japan—represent approximately $8.8 trillion in GDP terms. That’s at least the size of China’s economy and much bigger than Japan’s. The three core economies of the Eurozone are thus key to growth and recovery of the global economy in general, as well as to emerging markets in particular since 56% of Germany’s nearly $4 trillion economy is derived from exports. So go German exports, goes Germany; and so goes Germany, goes the Eurozone and, in turn, many of its emerging market trading partners. And Germany’s export driven economy is facing significant further headwinds in the near term.
The USA engineered coup in the Ukraine earlier this past February, and the subsequent USA driven sanctions on Russia ever since, have already begun to have a significant additional impact on Germany’s exports, as well as other Eurozone and EU economies like Italy, Finland, Austria, and East Europe.
With little to lose economically itself from imposing more severe sanctions on Russia, in contrast the Eurozone and EU economies which have much to lose, the USA has continued to push hard for more Russia sanctions from Europe, the effects of which are now beginning to take a toll on the already weak Eurozone economy. The impact of those sanctions on the Eurozone, and Germany-Italy in particular, will no doubt continue to grow in the coming months, thus further ensuring that Europe slides into its 3rd recession.
The impact of sanctions on the Eurozone economy is measurable not just in terms of quantifiable goods (exports-imports) and money capital flows between Europe and Russia, but also in the more difficult to quantify psychological effects on investment as a result of the continuing crisis in the Ukraine and sanctions.
Political crises have economic effects, even though difficult to trace directly to GDP and economic growth. But psychological forces in business and consumer confidence trends are a factor nonetheless, and are now also playing a role pushing the Eurozone into recession.
Apart from the trade and psychological effects of sanctions, demands on Europe in the near future to provide further bailouts for the Ukraine’s now collapsing economy will contribute still further to the recessionary slide of the big three Eurozone economies.
The Ukraine’s currency has fallen 60% in 2014 and much of the IMF and EU $18 billion deal last May has already been earmarked for $6 billion payments to Euro banks for previous bailouts. More of that $18 billion will be used by Ukraine’s central bank to finance exports and to offset its currency decline. Little therefore remains of the IMF’s initial $18 billion bailout package to stimulate Ukraine’s real economy. As this writer predicted last March, the Ukraine economy will contract 10-15% in 2014 and will need an eventual $50 billion in bailout funding from the west. But with the IMF not likely to provide a further bailout anytime soon, and the USA providing only token financial assistance, the Europeans will be faced with providing further Ukraine bailouts.
The continuing Ukraine crisis and the burden of providing still more bailout will further depress economic sentiment in the Eurozone’s core economies.
In addition to the preceding negative forces, there’s the Eurozone’s own more fundamental problems which are deep and remain still unresolved: i.e. little or no improvement in the region’s record level of unemployment; the lack of real wage growth to stimulate consumption; private banks continuing to hoard money and not lend; and business investment and confidence drying up.
On the policy front the Eurozone still appears committed, nevertheless, to a monetary policy that has not only failed in Europe, but in the USA and Japan as well: i.e. still more liquidity injections by the European Central Bank (ECB) into the private banking system, accompanied by a policy of austerity on the fiscal side that has been modified only slightly less severe in recent years.
The ECB’s monetary policy to date has been to inject more than $1.5 trillion of liquidity into Euro banks, primarily by means of its LTRO program—a program in some ways similar to quantitative easing (QE) by central banks in the UK, USA, and Japan. This primary reliance on monetary policy as the road to recovery thus echoes the USA Federal Reserve, Bank of England, and Bank of Japan’s similar policies since 2009. All the central banks of the advanced economies (AEs) have introduced near zero interest rates, while implementing additional ‘quantitative easing’ (QE) direct central bank purchases of investors’ bad assets at subsidized prices.
But in all cases, none of the AE central bank monetary injections have had much positive effect on AE real economies. The banks have mostly hoarded the injections, not lent investment capital in any substantial amounts to businesses that would produce jobs, and instead have redirected the liquidity to financial speculation that has fed new financial asset bubbles worldwide. In other words, whether QE-LTRO or zero rates, the effect has been the same: financial asset inflation on the one hand, and, on the other, tepid or stagnant real growth, a drift toward deflation in real goods and services, little or no job creation, and repeated bouts of real economic stagnation and/or recessions .
More liquidity injections by the ECB in whatever form, including a Euro-QE, will therefore not halt the Eurozone’s slide toward its third recession, nor its steady drift toward price deflation in the real economy. At the same time, the real and psychological effects of sanctions and the Ukraine crisis, the problems in bank lending, weak job creation and wage growth, and flattening business and consumer confidence, will continue to deepen the Eurozone’s economic contraction and drift toward deflation in 2014.
Dr. Jack Rasmus