EU economic stats are getting grim
Posted by Jason Apollo Voss on May 20, 2009 in Blog | 1 commentHello everyone!
In addition to tracking the U.S. economy and its travails, I have been closely following the other major economies around the world. In general, the story is not good. Rather than summarize an extant story I am just going to quote a story by the good folks at Stratfor. Stratfor is short for Strategic Forecasting and they provide spectacular analysis of geopolitics. Their economic coverage is not quite as good as the geopolitical. Here is their story about the European Economic Union’s economy:
The European Commission’s statistical office, Eurostat, released data May 15 for European gross domestic product (GDP) growth indicating a 2.5 percent quarterly decline in both the 16-member eurozone and the European Union as a whole for the first quarter of 2009. Year-on-year, the first quarter of 2009 saw a 4.6 percent decline in GDP for the eurozone and a 4.4 percent decline EU-wide.
The country data for GDP growth rates in the first quarter of 2009 show that the European Commission’s annual forecast for 2009, published May 4, may have been too optimistic. This is extraordinary considering that the forecast was already quite dire to begin with. In fact, STRATFOR also may have been too optimistic about European economic performance, despite having had a consistently bearish outlook on the European economy. While we pointed out the underlying banking problems besetting Europe before they became apparent in September 2008, we may have understated just how long the recession had been going on.
First, the economic slowdown in Europe did not start with the financial crisis in September 2008. It had already been in effect in some European countries (Denmark, Estonia, Ireland, Latvia, Luxembourg, Portugal, Slovakia, Finland and Sweden) from the first quarter of 2008, and was well under way by the second quarter (extending to Germany, France, Italy and the Netherlands). This means that the present recession essentially has already been impacting parts of Europe for well more than a year.
In fact, the list of countries experiencing GDP decline in four out of last five quarters (from the first quarter of 2008 to the first quarter of 2009) is very long, and includes Denmark, Germany, Estonia, Ireland, Spain, France, Italy, Latvia, Lithuania, Luxembourg, Hungary, the Netherlands, Portugal, Finland, Sweden and the United Kingdom.
The current economic crisis in Europe is further shaping up to be very deep and much more severe than the U.S. recession. The United States experienced a quarterly GDP decline (quarter on quarter) of 1.6 percent in first quarter of 2009, equaling the decline in the fourth quarter of 2008.
In the accompanying chart, countries labeled in green are experiencing a recession of roughly the same intensity as that in the United States (though all these countries in fact are experiencing at least a slightly more severe downturn). The countries labeled in yellow are experiencing an annual downturn at least twice as bad as that of the United States, and potentially even three times as bad. In terms of the first quarter of 2009 GDP growth rates, most notable in this category are Germany (3.8 percent decline) and Italy (2.4 percent decline), the largest and fourth-largest economies in Europe. The countries in red — the Baltic states — are looking at a Great Depression-style, double-digit downturn for 2009.
Therefore, not only is all of Europe essentially going to experience a recession deeper than the one in the United States, but the European economic downturn actually predates the U.S. recession by nearly nine months.
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I have been saying since last fall that the Europeans were likely to have a deeper recession than in the U.S. This is largely because the European economy does not have the same capacity to grow as does the U.S. economy. This is due to a lot of factors, including intense regulation, regulatory redtape, they don’t work as many hours, and they seem to lack the culture of innovation that the U.S. has. But the biggest reason that the reason that the EU was likely to suffer a deeper recession than the U.S. is that it has a number of states that resemble third world countries. And another big reason is that there is not a unified over-arching monetary and political authority. That means that there cannot be a unified response to trouble. Egads! The question is: to what degree will the troubles in Europe affect the U.S. economy?
I am not sure I have an answer at this point – I will be researching this issue over the next several days and see if I can give you a better answer. My initial gut feel is that the U.S. has done much better than Europe for decades and that European economic weakness is not that important. But don’t bank on that opinion please until I can spend a little more time getting all of us a better answer.
Respectfully!
Jason
STRATFOR has followed the European recession as it echoes the U.S. recession, pointing out that Europeans are in a heap of trouble unrelated to the financial crisis that first hit in mid-September 2008. The recession has exposed Europe’s underlying banking problems, particularly in emerging Europe and Germany. It unearthed the looming housing crisis on the Continent and struck Europe’s export-dependent economies (with Germany, Sweden and Switzerland the more notable examples), which are reliant on global trade demand. Taking in the new GDP growth figures released for the first quarter of 2009, however, and considering the actual length of the current downturn in Europe, our forecast on Europe — despite the pessimism — might actually have been overly optimistic. And that is saying a lot.
I’m a little late in catching up on my reading right now, so you’ll have to excuse the delay.
You say the European economy is going to see a nastier recession than the US and come out of it slower. This is due to, among other things, increased red tape and regulation of business. How does that reconcile with your desire for increased regulation here in the states?
Is the regulation just managed poorly? Surely there is no way to avoid that, right? We can’t make government run like business, so we’ll never have that sort of efficiency, so we have to assume that everything that gets managed will be done so imperfectly. Is there a middle ground in regulation amount/style between US and Europe? Is the US the middle ground between Europe and 3rd world countries?
Perhaps this tangent leads to a more philosophical question: are people inherently evil? Is the evil of regulation necessary because it is lesser than that of unfettered businessmen? One assumes the purpose of financial regulation is to soften the economic lows, which means we lose the economic highs, correct?
Since you say so often how our lack of regulation got us into this mess, I was intrigued to see you explicitly mention it as a hindrance to EU recovering.
As always, I am humbled by your insight, and enjoy your analysis of the situation!
Nate