The poor news from the real economy continued in Europe overnight. On the back the action earlier in the week in which S&P and Fitch downgraded Spanish banks and Moody’s downgraded Spain, Italy, Portugal, Slovakia, Slovenia, and Malta, the latest report on economic growth out of Europe shows the area is once again on the brink of recession.
According to the stats, gross domestic product of the 17 countries of the eurozone shrank 0.3 percent quarter on quarter in Q4 2011. As usual, however, the high level numbers hides the detail and a closer look reveals that the zone is wearing the burden of the downturn unevenly. Outside of the nations who are already under some form of “program”, the figures from Spain and Italy are of most concern. As I have explained previously Italy has the ability to resolve its debt issues while staying in the euro, but only if it is able to increase it productivity and industrial output:
The real problem in Italy is that its economy has been stagnate for nearly the entire decade. According to the IMF between in 2000-2010 among all countries of the world Italy only grew faster than Haiti and Zimbabwe. In 2010, Italian GDP was only 2.5% higher than in 2000. This problem is actually made worse by the fact that this is such a long term trend. Italy’s per-capita GDP growth was 5.4% in the 1950s, 5.1% in the 1960s, 3.1% in the 1970s, 2.2% in the 1980s and 1.4% in the 1990s. Since the new millennium the country has hardly moved forward and if we extrapolate out that trend Italy will spend the next decade in contraction.
The problem is that the latest data clearly show that the trend is continuing:
The value of the country’s economy during the fourth quarter shrank by 0.7 percent from the prior three months when it contracted 0.2 percent., national statistics agency Istat said in a statement of preliminary numbers on Wednesday. Economists generally define an recession as two consecutive quarters of economic contraction.
Government officials and business trade groups had predicted that the economic crisis had pushed Italy into a recession, with deputy finance minister Vittorio Grilli in December forecasting that economic output will shrink this year and stagnate in 2013.
That isn’t good news for a country because it also has a demographics issue that is likely to put downward pressure on its economic output over the next decade.
Of more immediate concern to me, however, is Spain. I have previously mentioned I consider Spain to be a very real danger to global economic stability no matter what the recent trend in their bond yields tells you:
The latest set of fiscal data from Spain’s national statistical office, the National Statistics Institute (NSI) showed the Spanish GDP, in line with market apprehensions, fell behind the red mark in the final quarter of 2011.
The preliminary data from the office showed Spanish GDP contracted by 0.3% in the fourth quarter. The figures were in line with the estimate published by the country’s central bank on 23 January. That, coupled with the burgeoning unemployment numbers, made it look even more likely that the Iberian country was set to enter another recessionary phase.
Over the last few days there have also been some rumours spreading about the credibility of the country’s economic reporting and also pending action from the EU against the country. No doubt driven, in some part, by the outcomes of the first ever alert mechanism report:
The Deputy Prime Minister has said that the doubts that Spain would have inflated the deficit figures for this year are “absolutely false” and that “the credibility of Spain can not be questioned.” Also, the EC has denied “categorically” that has suspicions as he had assured Reuters. From the Executive’s own vice president, Soraya Saenz de Santamaria, was released on Tuesday afternoon to the passage of speculation in the Congress of Deputies and has dismissed as “absolutely false” the alleged suspect.
Although these may just be rumours started by a media outlet in search of a story, I’m starting to get a sense that the co-operative nature of the European eco-political structure is beginning to unwind. Obviously we have already seen this in the growing tensions between the EC and Greece, but that relationship appears to have reached a new low overnight with a not-so-usual address by the Greek President lambasting the North for their insulting behaviour:
Greece’s president accused German Finance Minister Wolfgang Schaeuble on Wednesday of insulting his nation, reflecting growing public resentment of almost daily lectures from Berlin on the dire state of the Greek economy.
A visibly angry President Karolos Papoulias singled out Schaeuble after he appeared to suggest Greece might go bankrupt, and also attacked critics of his country in the Netherlands and Finland.
“I cannot accept Mr Schaeuble insulting my country,” said Papoulias, an 82-year-old veteran of Greece’s resistance struggle against the Nazi occupation of World War Two.
“Who is Mr Schaeuble to insult Greece? Who are the Dutch? Who are the Finnish?” he said in a speech at the Defence Ministry.
And it isn’t just Greece that has noticed. Mario Monti delivered a similar message to the EU overnight in which he stated he has also had enough of the name calling:
Italian Prime Minister Mario Monti warned on Wednesday that the euro zone debt crisis was fuelling dangerous divisions and resentment within the currency bloc and said it was wrong to try to divide member states into “goodies and baddies”.
Addressing the European Parliament in Strasbourg, Monti said that while southern, so-called peripheral countries were widely blamed for the debt crisis, France and Germany also carried major responsibility for watering down the bloc’s fiscal rules.
“The euro zone crisis has given rise to too many resentments and re-created too many stereotypes, it has divided Europe into central countries and peripheral ones; all these categories must be decisively rejected,” he said.
This squabbling is completely counter-productive but appears to be continuing as Reuters reports on yet another hold-up and possible restructure of the Greek deal due to lack of trust in the Greek authorities, even though all leaders have now pledged their support for the package:
Euro zone finance officials are examining ways of delaying parts or even all of a second bailout program for Greece while still ensuring it avoids a disorderly default, several EU sources said on Wednesday.
The delays could possibly last until after Greece holds elections expected in April, they said, although it depends to what extent Greek political leaders make firm commitments on further spending cuts and labor reforms unpopular with voters.
While most elements of the package, which will total 130 billion euros, are in place, some euro zone finance ministers are not satisfied that all Greece’s political party leaders are fully behind the reforms and so want legal guarantees.
As FT reports, they are all running out of time.