As austerity sets in on the periphery of Europe mainly (thanks in large part to the flawed currency system) there are increasing risks that a double dip could develop.  Of course, many of these nations remain mired in deep recessions or depressions and the recent bailout packages all involve harsh austerity measures that will certainly keep them on their knees for years to come.  As the problems in Portugal, Spain and Italy evolve there is the potential for even greater austerity and forced pain in the EMU. Meanwhile, the core nations have largely recovered, however, there are signs of weakness.

In a recent strategy note the always excellent Michael Darda, Chief Economist of MKM Partners detailed the reasons why he is becoming increasingly concerned about a Eurozone double dip:

  • Leading indicators in the Eurozone have rolled over. The OECD’s Euro Area Composite Leading Index has declined for seven consecutive months:

  • Euro-area monetary aggregates are weak across the board.  Both M1 (narrow money) and M2 (broad money) are contracting on a three-month  annualized basis in the Eurozone;
  • However, euro-area business confidence is nearly back to peak 2007 levels.  Despite the ongoing struggles, business confidence is high in the eurozone. However, confidence levels tend to be elevated at cycle peaks and depressed at cycle troughs;
  • Weak money growth and strained credit markets suggest a high risk that the euro-area nominal GDP recovery could be stopped in its tracks.  Absent a powerful positive shock to the velocity of money, European nominal GDP growth is likely to slow sharply;
  • Debt spreads in Spain and Italy are showing a troubling pattern of “higher highs and lower lows”.  Despite backing off a bit recently, sovereign debt spreads in Spain and Italy are near record highs.  Worryingly, each successive “peak” in spreads has been higher than  the previous one while each“trough” has also been higher.
  • One way out of this mess would be for the ECB to expand its balance sheet more aggressively, but it’s not doing so. The  ECB’s balance sheet (the asset side of the monetary base) is growing at less than half the historical average despite wide credit spreads, contained inflation expectations and weak broad money growth. There’s even talk in some circles about the ECB tightening policy this year.

Warren Mosler, Founder and Principal, III Offshore Advisors, elaborated on the Darda commentary:

“No question austerity will work – that is, it will force negative growth.  Question is just when.  Unless they make fiscal adjustments, but that seems unlikely.

I’m starting to feel a deflationary malaise coming on as the end of year/beginning of new year related activity subsides.

Headline CPI increases to me are mainly just relative value shifts that rob demand for other things,
and are not anywhere near pushing through to core measures which would pass them on to indexed compensation.

But the talk of inflation is just one more thing keeping global authorities thinking they don’t need another ‘fiscal stimulus’ as they continue to push spending cuts and ‘fiscal responsibility’.

Housing going nowhere. Jobs going nowhere as GDP growth only marginally exceeds productivity growth.

Financial sector finding it hard to make a buck as loan demand remains weak and competition is driving down net interest margins and spreads in general. (I’m thinking of holding a walkathon to help them out. Anyone want to kick in a few cents a mile?)”

The world is at an interesting stage of economic growth currently.  The United States has done just enough to muddle through and generate positive economic growth though not enough to substantially close the output gap and get the country anywhere close to full employment.  China and much of Asia, on the other hand, initiated severely misguided fiscal packages during the 2008 downturn that now appear to be substantially contributing to their inflation woes and potential overheating.  Europe, on the other hand, has been mixed with the core benefiting largely at the expense of the periphery.  Austerity measures on the periphery are creating deep economic holes and the potential is for the problems to worsen as the likelihood for aid in Portugal, Spain and Italy increases in the coming months and years and only worsens the austerity virus.  Europe remains a divided economy with the core recovering and the periphery still in recession.  If the problems in the periphery worsen or even fail to improve there is an increasing likelihood that the growth on the core will weaken and Darda’s concerns will come to fruition.

Source: MKM Partners


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • LVG

    China’s overheating, Europe is slowing and America is bumbling along. Is that enough to just maintain the status quo and continue the growth in stocks that we continue to see? At what point does it just hit a wall?

  • boatman

    darda is very interesting to watch with his day old stubble and godfather tone.

    i’m counting on big EUR problems.

  • JH

    Europe’s problems, much like the US, have less to do with it’s often blamed monetary system and much more to do with it’s eroding employment situation. I am old enough to remember when the streets of the US and the world were traveled by many MG’s Triumphs, Jaguars, Fiats, Morris, Renaults, and British motorcycles. You see none of that anymore. Likewise you see fewer and fewer made in America products. You cannot maintain a prosperous economy without producing products for export. Big business is getting uber wealthy exploiting third world labor at the costs of American and European jobs. The constant mantra of wealth thru credit is idiotic propaganda that has ruined the economies of both continents and threatens to enslave its inhabitants under the “company store” economic model.

  • FDO15

    Those jobs are gone. They are not coming back. Americans like cheap crap and US companies give it to them by arbitraging the labor away. That’s that.

    America and Europe’s problem is that they have become too dependent on the FIRE industries for growth. And now that those industries have tanked there is no real growth. And what do the politicians do? They try to revive those industries. So now we get to take another ride on the merry go round of hell.

  • tradeking13

    I’m still waiting for Darda’s V-shaped recovery in the US.

  • JH

    The FIRE industries were manufactured to allow the exportation of the manufacturing jobs base. The FIRE industries were manufactured in order to allow the exportation of the manufacturing jobs base without public outcry.
    The FIRE industry cannot exist without the lax lending and interest rate environment created by the same interests who are benefiting from the low manufacturing cost high profit retail trade.
    This could all be turned around with trade and tax policies, in the same way Germany protects its manufacturing base. Although that would require pressure from and informed public.
    Unfortunately, the American public is incapable of joining together in its own interest. The truth is, they are as dumb as a box of rocks.

  • boatman

    u got it FDO

  • Cullen Roche

    You’ve gotta admit though – he called it better than most. I recall him being bearish in 2008 and quite bullish in 2009.

  • Roger Ingalls


    Hoping EUO pays off, not looking all that good at the moment.

  • Zebra

    Can someone tell me if Irish doing something similar to what US is doing? eh, print its own money?


  • Mister

    whats FIRE?

  • Cullen Roche

    It’s being done with ECB permission. So, it’s really no different than the ECB doing it.

  • Andrew P

    Yeah, but the ability of an EU State to print up Federal currency to shore up its banks (albeit with permission or at least a wink and a nod from the ECB) does prevent the scariest scenarios of EU financial collapse from ever happening. There is no way that an electronic bank run on an EU State’s banks can ever bring down the whole system if a State can do this.

    In contrast, there is no way that any US State can print US Dollars. The Fed and the Treasury do not have the authority to allow it even if they wanted to, and the Treasury can’t bail out a State without an appropriation from Congress. (I’m not so sure about the Fed, as they might be able to buy State debt in a crisis and get away with it.) In a way, this makes the US Muni debt squeeze much more serious than the EU PIGS problem.

  • rhp

    I think the Bernank said that under Dodd-Frank, it is illegal for them to buy debt from entities that are deemed insolvent. He said that to imply the FED would NOT be bailing out states………

  • hillbilly

    Finance, Insurance, Real Estate.

    The manufacturing jobs will come back at some point in time for the same reason they left. It would be nice for the majority of the citizens if the govt. expedited that time instead of delaying it, but we all know that ain’t going to happen.

  • Robert

    GDP chart only goes to Mar 10 and the leading indicator appears to be cooincident