Eurozone, the Unraveling (I): A recession for Christmas

We’ve reached a new stage in EU history: the most significant exercise in federalism – the euro – has in its current form caused a double-dip recession. This is a tragedy and a perfectly avoidable one at that. This slow-motion train wreck – to not speak of economic suicide – is worth documenting and understanding however, both given the devastation it will cause my generation in particular (youth unemployment, at 20% now, will also rise) and the shame it represents for all convinced Europeans.

So, in honor of Tom Ricks (author of Fiasco on the Iraq War, another avoidable tragedy of higher order), I’m launching this series of posts. I am, sadly, very confident there will be lots, lots more bad news to cover in the coming months (years?).

Eurozone and U.S. unemployment had largely run parallel one another during the first stage of the economic crisis, with both stabilizing around 10%. Now, the U.S. rate is rapidly dropping, reaching 8.6% last month, while the eurozone’s, after a modest decline, rose to its highest-ever figure of 10.3% in October. Deutsche Bank and Barclays are now predicting the eurozone economy will shrink 0.3-0.5% in 2012.

These are the consequences of 18 months of dithering, indecisiveness and denial by European leaders, and in particular those of Germany and the European Central Bank.

There is no indication the existing medicine of austerity, ECB inaction and attempts as social engineering entire nations into “competitiveness” via apatride bureaucrats (the IMF and Commission) will succeed now, any more than it did with Greece.

Nor is there any evidence of a coming change of policy: The Germans have now restated their rejection of ECB intervention, even in the event of a good fiscal union deal. Mario Draghi has already made this fairly clear even before the latest “last chance summit” (which I had the honor of liveblogging into the wee hours of the morn). Paul Krugman’s skepticism towards the optimists’ speculation (including my own) of “ECB intervention for fiscal union deal” was then fully justified.

Ironically, Berlin and Frankfurt’s ham-fisted approach to debt reduction and hard money is unlikely to achieve either objective.  I don’t need to emphasize the devastating effect shrinking economies and higher deficits resulting from unemployment will have on overall debt levels.

Economies like Italy, Spain, Ireland and Portugal – already on the verge of paying interest rates on debt so high it makes repayment a mathematical impossibility – will come even closer to defaults which would wreck the European financial system and wider economy. The debt-death spiral is already resuming after the (increasingly brief) post-summit calm: Italian yields are rising and the euro is now rapidly losing value.

There is no telling where this ends. What is clear is that existing trends are unsustainable and likely to get worse. Means there will be plenty to blog about and many more sleepless Council summits.

UPDATE: Talk of the devil, Eurostat has just come out with its estimate that employment shrank by 0.1% point in Q3 of this year in both the eurozone and EU27. It has likely gotten worse still in Q4.

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2 Responses to Eurozone, the Unraveling (I): A recession for Christmas

  1. marknesop says:

    Over at Spiked, Phil Mullan lets us in on his Christmas wish: Dear Santa, please get rid of the Euro.

    Is that possible, do you think? How would Eurozone countries return to their previous national currencies in an orderly fashion, or could it not be done? How, in such an event, would Eurozone debt be apportioned? What kind of assistance package might be cobbled together to save the debtor nations you cited, or would they just be allowed to go under? If such an assistance package were ginned up, how would it differ from the same old Eurozone bailout, just in a riot of different banknotes? Lastly, who benefits from Eurozone collapse?

    Merry Christmas to you, and a Happy New Year. Hopefully Europe can forget its troubles for a few days to enjoy time with families; nothing is broken that can’t be fixed, although the degree of hapless stupidity it took to get this far argues it will not be easy.

  2. Hey Mark,

    IMO, I can’t see how the thing could be undone without the markets crapping their pants. But, notwithstanding the recession, perhaps the ECB’s stealth bailout will sort things out.

    A very Merry Christmas & Happy New Year to you!

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