Little GDP growth in Eurozone

Good morning everyone!

First quarter gross domestic product numbers for the eurozone are out.  By the way, over the last several weeks I have been throwing around the terms European Union and eurozone without discussing the difference.  The eurozone is the collection of nations that all use the euro as their currency.  This group is a subset of the bigger European Union which is the big free-trade zone in Europe.  Anyhow, first quarter GDP growth was a very, very tepid 0.2%.  In other words, a sneeze’s worth of growth.  This figure compares to 0.0% GDP growth in the fourth quarter.

Analysis: The very small growth in the first quarter happens at a time when much of the world is looking to Europe and its economy and economic policies.  In the context of the massive bailout announced over the weekend, the GDP growth looks a little scary.  This is because austerity measures are going to be implemented in Europe, and unlike the United States, government spending is a bigger portion of the economies of Europe.  A decline in government spending would put the eurozone back into recession.  Additionally, the big debt burden of the bailout monies will begin to generate interest expense that has to be covered in the economy.  This is an additional drag on eurozone GDP.  In short, it doesn’t look good for Europe.

Mitigating against the above scenario is the possibility that the debt spending to unfreeze European credit markets will begin to get the economic blood, money, circulating again.  Europe is suffering from a credit freeze that has endured longer than in the U.S.  Hopefully, the budgetary austerity measures, in conjunction with the spending of bailout monies will result in a credit thaw.  The problem is that credit is only useful if it goes to finance projects that are economically beneficial.  And let’s just be polite by saying that Europe is not exactly known for its innovative ideas.

My feeling is that the world’s financial markets will be mildly enthused that first quarter GDP was positive.  But that they will eventually do the above calculus that I did and realize that it’s looking a little tenuous across the Atlantic.

Importance grade: 8; while it’s nice that the eurozone showed economic growth, the amount was basically a statistical error.  What’s more, the policy choices of the eurozone finance ministers are narrowing, not widening, because of the bailout.  It is unclear just what Europe can do to get out of recession at this juncture other than to just sweat it out.  On balance, I think that this news will be interpreted as being negative, not positive.

[Shout out to European governments: Take this opportunity to make it easier to start a business in Europe.  Take the opportunity to diminish the power of labor unions.  Both of these two things hamper economic growth there.]

Jason