Investment Contrarians

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

By for Investment Contrarians |

Eurozone’s Digging Its Own GraveGreece 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.

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  • woja53

    The very thing that is hurting the broke and soon to be broke eurozone members is the euro itself because it provides no avenue of fiscal manipulation by individual member countries.
    Simply put, the value on the World market of the euro currency is way, way too high for the countries you mention in your report and many other member countries also but to varying levels because of varying levels of indebtedness and productivity levels just to name two ingredients.
    So, without the opportunity since adopting a single currency each country that is not the dominant economy within the eurozone of being able to devalue the individual currency to allow 'effective parity' rather than 'actual parity' with other member states the poorer countries will always become poorer and poorer without any mechanism to fight back.
    My question is this: Why is it that with all of the billions of euros spent on wages and salaries for eurocrats and other financial guru's within the eurozone don't individual governments "get" the obvious message that they all need to abandon a single currency mentality because it can never work under any scenario and even one where the financial sovereignties are handed to a central source as Germany would wish it? It is colonialism and dominion by stealth and nothing less. To the victor (Germany) will come the spoils. A new bigger Germany who's effective borders will extend to and around the Mediterranean with all of it's territories poorer than the area around Berlin but with all paying taxes for eurozone membership at an 'effective' level higher than Berlin.
    I feel sorry for the Europeans, even from the safety of Australia.