The eurozone recovery: still just around the corner

Paul Krugman is quite right: the most recent Eurozone GDP numbers are really disappointing. But hardly surprising, given current policies, unless you’re the sort of person who thinks that peripheral yields are the only thing that matters. (Not a great metric of success you would think, if they have been falling in Greece, but there you go.)

I recently read someone (can’t remember where, perhaps you can) saying — based on the yields —  that the eurozone crisis was now over economically speaking, and that the only thing that might derail things now was the politics. Which made me think two things:

1. It is surely unacceptable intellectually to regard the predictable political consequences of lousy economic policy as being somehow ‘exogenous’ and none of our business as economists.

2 If the politics of the eurozone crisis eventually turns sour, won’t this show up in various financial spreads , and wasn’t this the whole point of the ‘second generation’ crisis models we all starting teaching our students in the early 1990s?

Even if it’s cancer that kills you, death coincides with cardiac arrest.

21 replies on “The eurozone recovery: still just around the corner”

“We got into this mess because of excessive creation of private credit and money: we should be concerned if our only escape route implies building up a future excess.”

Lord Adair Turner, former Chair of the Financial Services Authority. His full speech on the subject is available here.

@ Kevin O’Rourke.

If we still see headlines like ‘Eurozone recovery: still just around the corner’ after another 6 years of analysis, will you consider that we may have reached the end of the useful road of the present system of money creation? And that it’s time for the national central banks and the ECB to acquire the sole power to create euros.

I know that we’ve been able to grow ourselves out of previous financial crises but obviously this cannot be a solution to all crises.

One indicator of how unlikely it is that we can grow our way out of recession is this graph of the M3 money supply going back as far as the 1970s. It’s doubled around every decade. Extrapolate that rate into the future and you’ll get a sense of unlikely that trend is to come, when you consider that it would require an already over indebted economy to borrow all of it into existence.

Meanwhile the UK powers ahead with strong employment, balanced growth and steady progress on debt reduction. It’s only daft nationalism that keeps us looking to Europe.

You left out the UK’s weak export performance, the property bubble being pumped up and the poor productivity trends …

“If the politics of the eurozone crisis eventually turns sour, won’t this show up in various financial spreads, …”

It’s already showing up. Greek 10 year yields went up half a percentage point the day before yesterday, I think on news of Syriza’s poll gains.

Some US ‘fundamentals’ are not looking so tickey-boo also. Appears all that made-up Fed money is going into the FIRE economy (or mostly). Makes the indices look good (mostly). But western developed economies are now consumer type (mostly), not productive. There be a problem.

So if consumers have reduced incomes and their future ones are looking iffy and they also have significant debts due to the prior consumption of more than their actual incomes could support: there be a problem.

Looks like its a case of treating a salient symptom, rather than the underlying, causative disease. But I have this queasy feeling that the disease is terminal (for consumerist economies). Expect hubris, then panic.

@ PF: Paul, no amount of any sort of money is going to ‘grow’ us out of our current economic swoon. Sure, if you gave all indebted persons a voucher to pay off their debts, things might stop getting any worse. That’s the ‘best’ that can be achieved.

But, folk will continue with policies which appeared to ‘work’ in past episodes of economic decline, even though the emerging evidence shows that they are not solving the current mess.

Times were that we used an existing store of wealth – in the form of pre-existing technology (which itself was the outcome of using its pre pre-existing wealth) and fashioned economically valuable goods, using inert raw materials and Free Energy. Value, wealth and money arose in parallel, and in proportion. That model failed, or more correctly is failing.

So now, we have to fashion the money (in virtual form) first and since our contemporary economic models must be correct, we know that value and wealth will follow. They have not – since its not physically possible to create real physical wealth ex-nihilo – as you can with fiat money.

The helmsman on the Titanic was ordered; “Hard a Starboard!”, and look what happened. Perhaps the outcome might have been different if he had been ordered to swing the helm to Port instead? Maybe: its too late for the Titanic. Do we still have some leeway available? We do. But not much.


Point is that this is as close as macroeconomics ever gets to an experiment. One country stays out of the euro and has the flexibility to thrive. The rest stay in and suffer. The key lesson is that it is a political failure. Osborne and co are fiscal hawks, so it’s not what KOR calls austerity that has failed. The failure lies in a daft political idea that handcuffs nation states. And for what? So we can pretend to be European?

@ BW

“Some US ‘fundamentals’ are not looking so tickey-boo also.”

“At this odd moment in time, the US markets are the beneficiaries of two contradictory trends: one is today’s reality and the other is tomorrow’s expectation.
Neither of them has anything to do with economic fundamentals, unfortunately. The bullish reality today is that the Fed is still supplying massive liquidity to the markets, driving asset prices ever higher.

So the market is going up for both reasons. Price/earnings multiples have gone from 14 times at the end of last year to almost 17 times – (2007 again).
“Multiple expansion is driving stock market performance to a far greater degree than earnings, while earnings themselves are being driven to a remarkable extent by share buybacks,” notes CLSA analyst Christopher Woods.
Those share buybacks amounted to some $218bn in the first half of the year, and keep rising, as do dividend payouts. Capex, of course, remains as subdued as ever. But never mind because, for the moment, that is what keeps the Fed with its foot on the monetary accelerator.

Analysts like Mr Wood are now beginning to query what can go wrong and bring the stock market down, beyond the sort of geopolitical shock that is always a possibility. His answer is the continuing threat of deflation.
As the disconnect between the rising prices of financial assets and the real economy continues, is it possible that even the most aggressive easing has limits? And does the fact that the more sceptical analysts are beginning to pose the question mean that this point is in sight?
The real incomes of most of the population have not risen at all. And if the only beneficiaries of QE are the very wealthiest, can their spending be enough to support the real economy? In a world where demand will probably be weaker tomorrow than it is today, can asset prices rise indefinitely?”

It’s all a house of cards. The US is not strong enough to pull Europe along and neither is China.

My point is that while the euro is a clear disaster the UK is not a good counterexample because it is only thriving an a highly selective reading of the evidence, and the factors currently giving it an appearance of health are not sustainable.


From David Smith of the Sunday Times who is always spot on about the UK economy.

“Manufacturing output rose by 0.5% in March, for a strong 1.4% increase in the first quarter, stronger than the overall increase in industrial production, which dipped by 0.1% in March but was up by 0.7% in the first quarter. Some of that was a weather effect, the mild March weather reducing gas and electricity output.”

“There was also a narrowing of the trade deficit to £1.3 billion in March from £1.7 billion in February. Though the improvement is slow – and both exports and imports are depressed – the trade deficit is narrowing. More here. Goods exports picked up in March, but the service sector – running a surplus of £7.2 billion in the first quarter – is the star performer.”

The big problem for the UK is the depressed performance of trade partners in the eurozone. There is much ado about the property sector but that misses the broad base of the recovery. You hear the same stuff about North Sea oil and gas, as though it made a huge contribution to GDP.

@Johhny Foreigner

Might it not be fair to say that the UK’s possible nascent recovery is the result of (a) Osborne ceasing to hit himself in the head with a hammer , (b) being a step removed from the ongoing disaster that is Eurozone economic and monetary policy and (c) the “Help to Property Bubble” wheeze rather than the man having any idea of what he is doing?

@ JF

“The big problem for the UK is the depressed performance of trade partners in the eurozone. ”

Nothing about the debt hangover from the last boom ?

I see the UK and Switzerland are both hoping to wean themselves off the EZ by exporting more to Asia.
Good luck with that.

Industrial production is up 2.3% yoy, manufacturing production up 3.3% yoy.

Whisper it – there was very little austerity in the UK in the first place. It was just a game of old cod played out between the Tories and Labour – it suited both of their bases to pretend that UK public spending was being savaged. Osborne was a hawk compared to Brown, but the reality is he has maintained the big budgets.


I am delighted to be able to announce that the UK is on the verge of recovering all the economic activity lost after 2007. This is something that I know has kept you up at nights. Sleep well me old mucker, our friends in Blighty are back in clover.

What is common to the US, Eurozone, UK and Japan are low levels of business investment and stagnant wages.

Germany had negative net trade in Q1 but a minimum 3% rise in negotiated collective bargaining deals plus additional employed helped to boost domestic spending.

US real wages have been stagnant to the year to April while 5% of the population is responsible for almost 40% of consumer outlays.

In Japan real wages are negative and in the UK, there was just a slight excess over inflation in the past 12 months for the first time since 2007.

In recent decades Japan and South Korea have led in unstable employment with more than one-third in such jobs earning low wages and having few rights – – it’s toxic in ageing societies.

The global trend of rising temporary and part-time jobs has been reversed in Germany, reflecting the strong jobs market in 2012 and a widening skills shortage.

In the UK since the bust, all the net jobs added have been either part-time or in self-employment.

In Ireland self employment in 2013 returned to boomtime levels – anyone who believes that reflects the real world is an eejit.

So booming stockmarkets and stagnant wages are not a very inspiring for a model that requires growth.

What is interesting about the Eurozone are the contractions in Finland and the Netherlands.
In Finland government revenues account for more than 56% of GDP and Russia is its main export market.

More here…


AN ABSOLUTE MUST READ ON UKRAINE – Political Economy & GeoPolitics

Michael Hudson: The New Cold War’s Ukraine Gambit
Posted on May 16, 2014 by Yves Smith

[Hudson concludes, in a brilliant (and IMHO accurate) exposition:]

The past century has seen a counter-revolution against the Enlightenment, classical economics and its culmination in socialist hopes to steer industrial capitalism to evolve into democratic socialism. What is occurring today is a self-destructive financial dynamic of impoverishment, dependency and breakdown in many ways like what happened when Rome’s creditor oligarchy plunged the Empire into the Dark Age two thousand years ago. The post-feudal real estate and financial oligarchies, the landed aristocracies of Europe and the great banking families and American trust builders have made a comeback, and the New Cold War is intended to lock in their victory. Ukraine is simply the latest battlefield, and battlefields end up devastated.

Michael Hudson is Distinguished Research Professor of Economics at UMKC, and former Professor of Economics and Director of Economic Research at the Latvia Graduate School of Law. His most recent articles on the post-Soviet economies are “Stockholm Syndrome in the Baltics: Latvia’s neoliberal war against labor and industry,” in Jeffrey Sommers and Charles Woolfson, eds., The Contradictions of Austerity: The Socio-Economic Costs of the Neoliberal Baltic Model (Routledge 2014), pp. 44-63, and “How Neoliberal Tax and Financial Policy Impoverishes Russia – Needlessly,” Mir Peremen (The World of Transformations), 2012 (3):49-64 (in Russian). МИР ПЕРЕМЕН 3/2012 (ISSN 2073-3038)
Неолиберальная налоговая и финансовая политика приводит к обнищанию России, 49-64.

@ David O’Donnell

There is no Utopia anywhere but Hudson presents a Western-influenced Dystopia as if the enlightened rule of Tsar Vladimir of his vassal would be a contrast with the interest of new Cold War mongers of the West.

Ukraine was as wealthy as Poland in 1990 and the process of moving from a state of corruption is a long one. Has Ukraine been more or less corrupt than the system operated by the Kremlin?

@Michael Hennigan

Ukraine was equal to Poland in 1990 – Poland is now 4 times richer. The Ukrainian Oligarchs are much worse than the Russian variety [who are not allowed to meddle in political matters] – one of them, a big Svoboda supported, organised the recent ‘war crime’ in Odessa – but doubt we will see him in Den Hague. The choice to voters later in May in Ukraine are all oligarchs or oligarch supporters!

So what do you think of the US using neo-fascist nazis to organise an outlandish disgraceful Nulandish putsch so that Corp Sys of energy, ag, and military can move in to strip the joint and frack it for the next 50 yrs (ChefRon)? And what about breaking those agreements on NATO expansion?

Hudson is not pro-Putin; read the piece.

Is Russia in the right to defend itself? Absolutely. Where would EU democracy [weak an all as it is] be without the sacrifice of 20 million Russian dead?

I agree that Uo Topos [‘no where’ in the original Greek] does not exist in the human lifeworlds; gotta chew gravel at times; an gotta fight the tyrants at times. I’m gettin really p1ssed off being lumped in with the so-called “Westh”.

Heard there were little green men, wearing no insignia, marching around Leinster House recently; a stirring of hope: woe is me – merely a rabble of failed FF and PD wannabees looking for a photographer or a journalist!

Spose there’s no chance of Cork declaring an independent Republic? I might emigrate!

What we thought was the most sophisticated banking/financial system in the world,designed by nobel prize winners and managed by some of the highest paid people in the world,is spectacularly crisis prone,unbelievably overleveraged,contagious because of the financial system’s interconnectiveness,and major problems with risk analysis and governance.
The old dogma of central banks that if we stabilize prices,the economy would be stable–has been totally shattered and disproved. When will the financial system return to normality–Japan’s banking industry/financial system has not returned to normal after 20 years. There is no coherent or agreed alternative.
Large current account deficits/global imbalances are very destabilising. Keynes’s worries about these have been proved correct. Debtors countries will not be paying back their debts. The federeal reserve printing presses will reduce America’s indebitness others will openly default.
Current growth trends are very poor and it is likely we will have much more difficulty managing our economic affairs in the future.
There has been a failure of global macro-economic policy management,in regulation,reserve accumulation,current account balances etc. Global banking problems are difficult to manage. Lehmans bankruptcy is still not resolved. There is no solution as to how to cope with the bankruptcy of a large financial firm operating in many jurdistictions
The eurozone is in deep trouble. There may be political unrest and the periphery will not be able to repay it’s debts, they will default and it will be very painful.

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