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A Fraying Union
Europe’s Economies on the Brink

Europe’s economy is teetering on the precipice of deflation. Yesterday’s news that the UK consumer pricing index rose by only 1.2 percent (the lowest in five years) was accompanied by news that France’s prices were growing at only 0.4 percent, while Spain and Italy’s price growth had dropped into negative territory.

German factory orders dropped sharply last month in a departure from expected forecasts. The Financial Times reports:

Factory orders fell 5.7 per cent in August compared with the previous month, the biggest drop since January 2009 when demand slumped in the aftermath of the global financial crisis[…]

Worries over developments in Russia and Ukraine, a slowdown in China and deflation in the eurozone have dented confidence in recent months. German GDP fell 0.2 per cent in the three months to June, compared with the previous quarter.

Demand for German exports fell 8.4 per cent in August while investment goods orders fell 8.5 per cent compared with the previous month.

“It doesn’t bode well for industrial production in the fourth quarter to be honest,” said Carsten Brzeski, chief economist at ING-DiBa. “What was worrying with the order data is that it was across the board. In Germany many commentators love to blame everything on Putin but it’s more than that.”

The “more than that” has grown to include an impending European boxing match between Paris and Brussels that highlights the economic weaknesses of Germany’s neighbors. The European Union is poised to reject France’s proposed 2015 budget that openly defies the EU’s agreed-upon limits upon France’s sizable deficit. Germany’s economy is now linked to its Western as well as its Eastern neighbors; since the European Union promoted a currency union before a corresponding political union, it is unlikely that Germany’s Western problems will go away any time soon.

Doctor Hans-Werner Sinn, president of the prestigious Ifo Institute for Economic Research, diagnoses French malaise in a recent interview with the Telegraph:

France is the socialist country of Europe, if not the world, because among the OECD countries, it has the second highest government share in GDP after Denmark. Neither the Danish nor the French economy work very well, they have an overgrown government sector which is 10 percentage points more than the German one, for example…The [French] people who were set free from manufacturing, or their children, have by and large been absorbed by the government sector, which has now a quarter of the workforce, twice that of Germany. Hiding the unemployed in government offices is not a healthy solution.

The attached graph further illustrates Sinn’s point. Le modèle bleu is alive and well in France while the industrial base that once supported it is moribund. To his credit, the French Prime Minister Manuel Valls has focused his recent attention on this growing impasse. Valls has filled his cabinet with center-left Young Turks who flirt with pro-business strategies that encourage growth. Yet he faces determined opposition within his own market-phobic Parti Socialiste that may hamstring his ability to implement any meaningful reforms.

Valls’ business-friendly rhetoric, if it translates into action, may be France’s best short-term hope to sidestep the pending Eurozone conflict. It’s the best solution for Germany, too. Europe’s fiscal union has connected German manufacturing receipts to global events in Athens, Paris, and Kiev. But betting on things working out in Europe in any definitive way has been a losing proposition for several years running. We have seen these standoffs before, and they have always been resolved by kicking the can down the road in one way or another—adding another layer of eurofudge, if you will, to an already teetering mess of a cake. The only difference this time around is that economic pain is being felt more broadly than before. Can it be enough to make this time different?

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  • Anthony

    An observation: in 1992 when the Treaty of Maastricht created the Euro, it was stipulated that member states should ensure that their budget deficits would be less than 3% of GDP and that total public debt would remain below 60% of GDP. Has creation of currency without a state post 2008 contributed to fiscal difficulties alluded to in Feed’s subject matter – especially reforms of the social state?

    • Sibir_RUS

      Global Financial Crisis: A World In Debt
      …the debt of Russia is so small, that it is almost invisible.

      • Anthony

        As you know, GDP measures the total goods and services produced in a given year within the borders of a given country. With that said and to your reference, Western countries are enmeshed in what appears to be an interminable debt crisis (public debt averaging about 90% of GDP). On the other hand, the question of public debt remains essentially a question of the distribution of wealth – the West is rich but the governments of the West are poor (public and private actors). Still, the public debt crisis presents a paradox. Thanks for links.

        • Curious Mayhem

          The West is rich in assets and income, but its liabilities are larger still. Artificially low interest rates currently mask the pain. They won’t forever.

          • Anthony

            The West’s national wealth (private wealth + public wealth) exceeds liabilities and my response to Sibir_Rus was premised on that formulation. “…what is most striking is that national wealth in Europe has never been so high. To be sure, net public wealth is virtually zero, given size of public debt, but net private wealth is so high that the sum of the two is as great as it has been in a century.”

  • Sibir_RUS

    Awara Group Study on Real GDP Growth Net-of-Debt
    In this groundbreaking study by Awara Group reveals that the real, debt-adjusted, GDP growth of Western countries has been in negative territory for years. Only by massively loading up debt have they been able to hide the true picture and delay the onset of an inevitable collapse of their respective economies. The study shows that the real GDP of those countries hides hefty losses after netting the debt figures, which gives the Real-GDP-net-of-debt.
    The moral of the study is that it is that GDP growth figures as such reveal very little about the underlying dynamics of an economy if one does not simultaneously attempt to analyze what part of the growth is credited to simply artificially fueling the economy with new loans.
    The shocking figures depicting the virtual crippling of the Western economies from 2009 to 2013 are illustrated in Chart 1. It shows the real GDP growth net-of-debt after deducting the growth of public debt from the GDP figure. Net of debt we see the scale of destruction of the Spanish economy, which amounts to the staggering figure of minus 56.3%.

    • Loader2000

      Simply subtracting debt from accumulated GDP growth figures over a 4 year period is not the best way to gauge long term economic health, especially if that 4 year period just happens to be during the worst recession in the last 70 years. In that case, the statistic is almost meaningless since GDP to debt ratios almost always go down during recessions. It is the recovery over the next 10 years that is important. GDP growth just has to keep the ratio of debt to GDP constant over a long period, or, even better, slightly shrinking. If that ratio is growing, and keeps growing in the future, things will eventually get bad. However, how bad they get and what solutions are used to solve the problem could result in anything from a major depression 20 years to the road to a relatively moderate recession in 5-10 years. Furthermore, game changing technologies (like the PC and the internet) tend to dramatically reduce those ratios in countries with the most free markets and the least corruption. In other words, I think you are grasping at straws. The culture of a country, the demographics, and the amount of corruption both in business and government will have much stronger long term effects on the future health of its economy than the GDP growth with the debt subtracted from it during a cherry picked 4 year period.

      • Curious Mayhem

        Debt is a cumulative stock, as are assets. The proper comparison is assets and liabilities, both stocks — not liabilities with income.

        Income or output per annum is an annual flow, on the other hand.

        It’s like the difference between a company’s balance sheet (assets minus liabilities) and its income and cash flow statements.

  • Jacksonian_Libertarian

    The West and most of the World have been in Great Depression 2.0 for 6 years now even if no one but me wants to admit the fact. This article talks about a “Consumer Price Index” without recognizing it is a subset of the Price Index for the entire economy.
    Here is the evidence for Great Depression 2.0
    1. Historically High Unemployment
    2. Historically High Bankruptcy rate
    3. Historically High Debt levels resulting in unwillingness to take on more debt
    4. Historically Low interest rates
    5. Historically High foreclosures
    6. Falling Wages – Unheard of except in a deflating economy
    7. Historically Low inflation despite the Fed’s printing of Trillions of Dollars. What “Consumer” inflation there is, is being created by Government bottlenecks like the alcohol in gasoline mandate, which drives up gas and food prices and costs the taxpayer subsidies as well.
    8. Banks are willing to lend only to the most credit worthy, and they raise credit standards to insure they will be paid back.
    9. When Banks don’t lend our fractionated banking system (look it up, you can’t understand capitalism without an understanding of it) doesn’t increase the money supply, as the monetary measure M3 money supply hasn’t grown in 5 years despite Trillions in Fed printing proves.

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