Eurozone GDP Growth Lags in August---Recession Lurks

   The EuroCoin indicator released today reported that Eurozone GDP growth came in at a bleak 0.37% in August. This indicator is a real-time indicator of Eurozone GDP and is released on a monthly basis, making it an important leading indicator. From the press release:

In August €-coin fell slightly, from 0.40% in July to 0.37%. The value of the indicator in this quarter indicates a slackening of the recovery compared with the previous three months.

The yield curve and the course of industrial production in the main euro-area countries held back the indicator, which was nevertheless sustained by the favourable results of business and consumer surveys.

   While we in the US are debating the chances of a double-dip, the EU already seems to already have arrived there with the debt crisis taking a heavy toll on the EU economy (especially the PIIGS). The only positive factor is that a weaker euro led to an increase in exports. However, this does not help the weaker countries like Greece, Spain, and Portugal because they lack a strong export industry. About the only hope for these debt plagued countries is for them to somehow increase exports, which will help restructure their balance of payments. There are only a few ways of rapidly increasing exports: currency devaluation or internal devaluation. A lower currency is not likely because the ECB controls monetary policy for the euro. This means that the only alternative for the PIIGS is an internal devaluation to help reduce costs and make goods and services more competitive in the export market. This option has already been implemented by some Eastern European countries like Latvia and Estonia. They reduced wages 20-35% across the board to regain competitiveness. It came at a great cost to the general population as poverty increased greatly, but, of course, these folks are used to suffering. Early indicators seem to suggest that this internal devaluation has worked despite the high social costs. The problem for the PIIGS is that their populations are less receptive to severe wage cuts, reduced benefits, and higher taxes.  

Black Swan Insights


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