For the 50th Time, the Eurozone’s Digging Its Own Grave

By George Leong for Investment Contrarians | Nov 28, 2012

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Greece finally received approval for its austerity measures and, in the process, will get another $70.0 billion or so in loans. The money is not earmarked for growing the Greek economy out of its deep recession; rather, it will be used to keep the lenders away as the country tries to get out of its financial crisis. What is happening in Greece and the eurozone is absolutely an economic farce that will likely take years to rectify. For Greece, the country will be stuck in its own economic abyss for years, even decades. The problem for Greece is that the deep budget cuts are occurring at a time of fiscal confusion, massive unemployment, and negative gross domestic product (GDP) growth. The deep cuts will hurt the country more in the short term, but they are needed to help Greece become a contributing member of the eurozone. As I said, it could take decades. Don’t believe me? Just take a look at the two-decade drought in Japan.

The Organisation for Economic Co-operation and Development (OECD) just suggested the global economy was on shaky ground again, with weakness in 31 of 34 member countries. (Source: Matt Nesto, “The Five-Year Funk: OECD Slashes Global Growth Estimates,” Yahoo! Finance, Breakout, November 27, 2012.) The report “Global Economy Facing Hesitant and Uneven Recovery” called for the eurozone to experience another two years of mild recession. GDP growth in the U.S. is estimated at a mere two percent for 2013, which is not unexpected, given the current conditions in America. Failure to resolve the fiscal cliff will make the growth worse.

The way I view it is the eurozone is currently sitting on pins and needles. Any major disruption could devastate the European economies and send the global economy back into another recession. Spain, Portugal, Greece, Ireland, and Italy are all in a recession. Spain and Greece are in a deep recession, bordering on a depression. Portugal will head into its third straight year of recession and is also broke.

The problem is that if a recession holds for another two years, it will not only hurt Europe, but it will also affect the U.S., China, and Asia. This is the fear.

GDP growth in the eurozone is barely there, while its debt levels are surging.

We are seeing more cuts in GDP growth rates across the board for 2013. GDP growth in the United Kingdom is estimated at a muted 0.9% in 2013, down from the prior estimate calling for growth of 1.3%, according to the OECD. And the reality is that the GDP growth could be even worse should the eurozone fail to sufficiently recover from its recession.

But what is really worrisome is that the distress with the weak members of the eurozone is negatively impacting France and Germany, the only two strong pillars in the eurozone. The German government cut its GDP growth estimate to one percent in 2013 from the previous 1.6%. (“Germany slashes its forecast for 2013 GDP growth,” BBC News, October 17, 2012, last accessed November 27, 2012.) France’s GDP growth is estimated at 0.8% in 2013, based on government projections. (“French Government lowers GDP growth hopes in 2013,” The Voice of Russia, September 10, 2012, last accessed November 27, 2012.)

For all those who believe the worst is over in the eurozone, I wouldn’t go there yet.

Trust me when I say things will get worse in Europe.

Tags: austerity measures, budget cuts, China, Europe, eurozone, financial crisis, GDP growth, Global economy, Recession