The Euro Area Economy is in Trouble

By Walter Kurtz, Sober Look

As discussed earlier (see post) the French economy continues to struggle. The nation’s consumer recession is now thought to be worse than Italy’s.

Markit (Trevor Balchin): – “France has overtaken Italy as having the worst performing retail sector of the three largest euro area economies. Sales fell at a survey-record pace, as did employment. Italy registered another steep drop in sales, while German retailers witnessed a flat trend in March.”

French economic output data suggests that the GDP growth – which has been lagging the Output PMI Index – will be in the red for a good portion of 2013.

A big part of the economic stagnation in France was caused by the implementation of the country’s own version of the “fiscal cliff”.

WSJ: – Mr. Hollande’s government responded to the weaker economy in 2012 by raising taxes by €7 billion ($9 billion) to try to limit the damage to public finances. If the government hadn’t done this, along with a smaller effort to curb public spending, the deficit would have increased above 5.5% of output, finance minister Pierre Moscovici said in a radio interview Friday. Another €20 billion of taxes have since been introduced for 2013.

But there is now evidence that tax increases are hurting the economy with Insee reporting that consumer spending power fell last year for the first time since 1984. Households, who typically make up well over half of GDP, cut their spending for the second month in a row in February and haven’t spent as little since June 2010, Friday’s data showed.

Retail sales indicator in France now points to conditions that are worse than during the 2008 recession.

Source: Markit

As the French recession deepens, it is dragging down economic activity indicators for the Eurozone as a whole.

Source: Markit

Moreover, the current crisis in Cyprus is expected to reverberate across Europe. In spite of being a tiny portion of the EMU’s GDP, the psychological impact of Cyprus’ botched “bailout” on the area consumers (and possibly banks) is expected to be material. The markets have in fact begun pricing in worsening economic slump in the Eurozone, particularly relative to the US. The recent decline in the euro has been relentless.

EUR/USD (source:

The confluence of Cyprus events and the recession in France and elsewhere across the area has prompted JPMorgan economists to downgrade their expectations for the Eurozone 2013 GDP growth – once again significantly below consensus. Europe just can’t catch a break.

Source: JPMorgan


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Sober Look

Sober Look

Sober Look was founded by Walter Kurtz, a New York based hedge fund manager and credit markets specialist.

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  • StJuste

    I’m unsure what Europe’s policy alternatives are. With China and the U.S. weak any type of monetary stimulus that would weaken the Euro and potentially make them more competitive risks raising the cost of petroleum imports, cutting into consumer demand and causing aggregate demand to fall. Fiscal policy appears also to be ruled out given the already high internal debt levels. Though seemingly unsatisfactory to all the current policy perhaps enhanced by more marginal reforms in the labor and internal product markets seems about the best Europe can do. Any thoughts?

  • David

    There is an alternative. Just one that is exceptionally unpalatable to the bankers. You cut all hidden support and allow markets to do their job. That will mean lots of big banks will fail, it will mean counter-parties and bondholders and shareholders holdings will be wiped out. It will allow housing markets to reset to sustainable levels. It might even mean that big depositors will suffer losses, but the assets of the banks will be sold to make good losses for small depositors. By doing so it will cut the support for inflated asset markets and actually open up more opportunities for new investments. There will be lots of openings for new banks. It will also mean that those that sold credit default swaps will go bust as they are forced to pay out. Though in the long run it will massively reduce the levels of derivatives holding back many markets. Hayek, Schumpeter, Minsky and Keynes all wrote about the excesses and the needs to unwind those bubbles. Burst the bubbles and new opportunities open up. Keep the bubbles going and the scope for new entrants diminishes. Look at Iceland doing much better than Ireland.

  • Andrew P

    Europe is in such deep doo doo that I don’t think the small depositors can blithely assume that they will get their money back in a reset. If you are an EU citizen, you should be very worried. The EU just proved that it is run by circus clowns in this Cyprus debacle, and it is probably not advisable to leave all your eggs in one basket. It is probably a good idea to spread your stash among different asset classes and “safe havens”, so that you have something rather than nothing when the system is allowed to reset. If the Euro breaks up, there will be a financial reset of some type.

  • StJuste

    This seems to me foolish. Investment, investment in what? where are the growth sectors in a Europe without natural resources, dependent on exports of of capital equipment, airplanes and luxury goods. There is only so much innovation one can count on, especially as it will be going to a world market that is not growing. Let the free market do it when you can not come up with one plausible scenario for what it would do seems to me the height of wishful thinking. One might as well be religious at this point, god has a plan too.

  • wallyfurthermore

    “Europe just can’t catch a break.”

    Meant as sarcasm, I hope? Europe’s economic czars are, after all, not trying to catch a break, Indeed, they are deliberately holding heads under water. A good textbook example of cause and effect… accompanied by self-delusion and denial.

  • Stephen

    Europe, a testament to Ideology trumps economics.Never mind the excrutiating pain,as good Puritans we know it will make you feel better.You might not be wlling to suffer for god,but you will suffer for our idea of Europe.

  • mercator

    Does anyone remember discussions over whether global economies can ever decouple again? It was the term of the year. Then somehow global regions regained global economic independence, or at least markets react that way. Nobody knows nothin.

  • Dave Thomas

    Why doesn’t anyone say it, centralized control of an economy does not work.

  • Tom Brown

    Probably because nobody thought they had to since no one here is claiming the opposite: i.e. that we *ought* to have “centralized control” of the economy.