Europe rethinking austerity?

As I noted yesterday, the chatter about Europe changing course on ‘austerity’ is growing, although as I stated although this appears to be positive step forward, I really think we need to wait until after September to get a handle on exactly what that means. The outcome of the German election is very likely to have a large effect on the policy shifts from Berlin and Brussels and, although we are seeing signs that the hard-liners are loosening their grip on policy, we’ve seen significant back-flips in the past.

In the meantime, the current policy framework within the region continues to slow economic output and retrench private sector investment. Overnight the OECD warned that the Eurozone is once again slowing more “than expected”:

The OECD has again cut its growth forecasts for the eurozone and called on the European Central Bank to consider doing more to boost growth.

The organisation says the eurozone will shrink by 0.6% this year, widening the gap between it and faster-growing economies such as the US and Japan.

The UK forecast was revised down to 0.8% growth this year and 1.5% in 2014. Meanwhile, the European Commission has given France two more years to complete its austerity programme.

France fell back into recession in the first three months of the year. Spain, Poland, Portugal, the Netherlands and Slovenia have also been given more time to complete fiscal tightening.

The move suggests a shift away from a focus on austerity in Europe.

Of note the OECD cuts Italy’s 2013 forecast again to -1.8% from -1.5%, France to -0.3% from 0.3% and the EZ as a whole to -0.6% from -0.1%, which appears to have put to bed the idea, being pushed by Mario Draghi and other Eurocrats, that 2013 is the year of recovery.

Overnight we also had some data on deposits in periphery banking systems which wasn’t exactly good news:

Consumer and company withdrawal of deposits from Cypriot banks accelerated in April, where big account holders in the two largest lenders were forced to take a hit as part of an international bailout.

Private-sector deposits fell by 7.3 percent to 41.322 billion euros after a nearly 4 percent fall in March, European Central Bank data showed on Wednesday.

Greece recorded a 1.6 percent decrease in private sector deposits, falling to 170.0 billion euros, and Spain saw similar development with a 1.5 percent fall. Deposits in Italian and Portuguese banks fell less than 1 percent each.

In line with that data, the ECB was also out with its monthly developments report and, as expected, private sector credit growth remains in the negatives:


Turning to the main counterparts of M3 on the asset side of the consolidated balance sheet of Monetary
Financial Institutions (MFIs), the annual growth rate of total credit granted to euro area residents stood at -0.1% in April 2013, compared with 0.0% in the previous month. The annual growth rate of credit extended to general government stood at 3.5% in April, unchanged from the previous month, while the annual growth rate of credit extended to the private sector stood at -0.9% in April, unchanged from the previous month. Among the components of credit to the private sector, the annual growth rate of loans was more negative at -0.9% in April, from -0.7% in the previous month (adjusted for loan sales and securitisation,the rate was more negative at -0.5%, from -0.3% in the previous month).

The annual growth rate of loans to households stood at 0.4% in April, unchanged from the previous month (adjusted for loan sales and securitisation, the rate stood at 0.3%, unchanged from the previous month).

The annual growth rate of lending for house purchase, the most important component of household loans, stood at 1.2% in April, compared with 1.3% in the previous month. The annual growth rate of loans to non-financial corporations was more negative at -3.0% in April, from -2.4% in the previous month (adjusted for loan sales and securitisation, the rate was more negative at -1.9% in April, from -1.3% in the previous month).

Finally, the annual growth rate of loans to non-monetary financial intermediaries (excluding insurance corporations and pension funds) stood at 0.6% in April, unchanged from the previous month.

So some hope for the future ? Maybe, but the current situation is still very dour. Full report from the ECB below.

ECB Monetary Developments April 2013

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  1. GunnamattaMEMBER

    Agree 100% they cant do much until after the German election and that OECD growth data is just disastrous all round. But I think that even after the German election convincing Germans that paying for stimulus elsewhere in the Eurozone is a good idea, is going to be a tough call.

    I also think that deposit data isnt likely to improve – the message of Cyprus was pretty clear. Slovenia and Hungary are on the radar at the moment, but public anger about banks in Spain is again at combustible levels.

  2. What a mess. And the under 25’s in Europe are bearing the full brunt with massive unemployment. A few tenths of a % point here and there of growth when UE in the <25 age brackets creeps into the high 20's% is not at all comforting I should think.

    Future misery is locked in, just like the Debts Europe has accumulated. People parrot on about their great standard of living and we all enjoy the Euro land and cityscapes but what an awful future for many Europe provides. And with the immigration challenges in their midst things could get unpleasant at anytime. Witness Sweden.

    They may be rethinking austerity, not that it essentially exists. But Europeans sure BETTER be re-thinking Debt and borrowing as an economic strategy.

    • Interesting article Gunna thanks. When people look back on this sorry episode I’m sure they will say “wtf were they THINKING?!”.

      I don’t think one generation set out to eat another. The Debt drug was just too good to be true so weak corrupted Gov’ts took it- only realising too late that it would be inter-generational type repayment process. Once the full extent of the damage was known they quickly realised that quarantine and damage control is the most convenient course if you wont be around to clean up the mess.

      If anything comes from all this it is that Govts are to be rigidly and legislatively constrained with levels of Govt Debt they can approve , meaning jail sentences for the transgressors. Set up clear accounting rules and metrics then any Govt official breaking the mandate gets immediately prosecuted. Taking on excess national Debt is akin to Govt putting the citizenry in jail. Bloody tyranny is what it is.

  3. “Austerity” in New Zealand in the 1980’s and 1990’s, meant “the government spending less than it took in tax revenue, and paying back debt”.

    The modern decadent west Keynesian – Orwellian meaning of “austerity”, means “a slight wind-back from the levels of government profligacy that helped get us into this mess in the first place”.

    Every nation that is in trouble now, has been through the same phenomenon. Government spending had already ratcheted up to a record high. Then a “new normal” occurred, that was actually a bubble – and finance ministers everywhere reveled in spending every cent of the new windfall revenues, and committing to ongoing programs of the same.

    Now, “austerity” is apparently a wind-back of spending to, say, “only 10% above 1999 levels”, which were already a record for the period up till that time… and this being single figure percentages under the “windfall revenue” spending levels.

    This is just nuts.

    I say the only way to get out of this mess is to tear up the strangulatory regulations on everything until the economy has recovered closer to a level at which people can reasonably expect “developed nation” protections from everything.

    People in developing nations can’t expect too much “protection” from their government – if they’ve got protection from criminals and can get contracts and property rights enforced, that is what they are most thankful for; people in developed nations who have been on the mother of all irresponsible splurges also need to lower their expectations for a while.

  4. Any country running a CAD (most of EU basically) will see their M3 shrinking because they are effectively exporting euros. Cant borrow it to replace it, cant print it, cant grow it with credit cause their banks are bust, so it will shrink. M3 shrinking = best recipe for recession.

    Fix CAD is another option, but how? Reduce imports means reduced consumption which in Europe is what, 70%-80% of GDP, therefore more recession. Increase imports, yeah sure, but who the hell will buy if the whole planet is either in recession or scraping the bottom?