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Generational Dynamics Web Log for 17-Aug-2011
17-Aug-11 News -- New GDP reports put European economy at near standstill

Web Log - August, 2011

17-Aug-11 News -- New GDP reports put European economy at near standstill

Sarkozy and Merkel reject euro bonds

New GDP reports put European economy at near standstill

Sarko and Merkel discuss euro bonds (PressEurop)

Sarko and Merkel discuss euro bonds (PressEurop)

The momentum with which the German economy started into 2011 has slowed down considerably, according to Germany's Federal Statistical Office (Destatis). In the second quarter of 2011, the gross domestic product (GDP) rose just 0.1% on the first quarter, after the result for the first quarter was corrected downwards to +1.3%. However, imports in the second quarter of 2011 rose more strongly than exports.That large increase in imports on the one hand led to higher building of inventories, while on the other hand it resulted in a balance of exports and imports that had an altogether negative impact on economic growth. Also, final consumption expenditure of households and capital formation in construction had a slowdown effect on the German economy in the second quarter of 2011.

The figures for Germany were much lower than economists had expected, and French GDP was also stagnant. Figures released later in the day showed that the entire eurozone growth was stagnant. The main reason for the bad eurozone figures was the slowdown in its two largest economies, Germany and France, according to Spiegel.

Many on-air commentators talked about what a shock this was, because Europe needed a robust Germany economy to lead the continent out of its debt crisis. As I've reported many times, economists in Europe and America have been counting on a "V-shaped" recovery in the last half of this year, so that the rapid growth would wipe out the staggering debt without any sacrifices. This prediction had been based on 1970s and 1980s macroeconomic models that are no longer valid because the generational constellation has changed.

I'd like to quote (paraphrasing) an analyst that I heard on BBC on Tuesday:

"The biggest worry is that the growth in consumption (consumer purchases) is falling. People have suffered a number of shocks that have created a sense of uncertainty, and people are starting to behave in a very careful manner. People are saving money like mad, which is causing the Germany economy to slow down, which will cause the whole of Europe to slow down. No one knows if people will continue to save, and not spend. No one can predict the future."

In fact, it IS possible to predict the future in some areas. We're repeating the 1930s, when economists and politicians were predicting that "prosperity is just around the corner," and were proven wrong. People today are becoming increasingly risk averse, just as they did in the 1930s.

Investors are risk averse too (WSJ)

Investors are risk averse too (WSJ)

This means that consumption is going to continue falling, and there's no hope at all of a "V-shaped recovery." To the contrary, the sharp fall in consumption will result in a deflationary spiral. There won't be any significant growth again until the 2020s, when the new generation of young people reaches teen years and starts nagging their parents for money to spend.

Sarkozy and Merkel offer additional disappointments

Investors had been hoping for one of Europe's famous "shock and awe" announcements, like the various nuclear option bailouts that have been going on for 18 months. In particular, when French President Nicolas Sarkozy and German Chancellor Angela Merkel met in Paris on Tuesday, they were hoping for a big "euro-bond" announcement. Under this scheme, all 17 eurozone countries would jointly issue and guarantee euro bonds, and individual countries would no longer issue national bonds.

Instead, Sarkozy and Merkel announced some vague plans for closer eurozone integration, according to Reuters. Sarkozy said, "We have exactly the same position on euro bonds. Euro bonds can be imagined one day, but at the end of the European integration process, not at the beginning." This immediately caused a Wall Street stock slide.

The European Central Bank (ECB) has been keeping Spain and Italy from falling off a cliff by purchasing €21 billion in bonds from the two countries at low interest rates. Several commentators indicated that they feared that Spain and Italy are now going to start falling off a cliff again, because the of the disappointing performance of Sarkozy and Merkel.

(Comments: For reader comments, questions and discussion, see the 17-Aug-11 News -- New GDP reports put European economy at near standstill thread of the Generational Dynamics forum. Comments may be posted anonymously.) (17-Aug-2011) Permanent Link
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Generational Dynamics Web Log for 17-Aug-2011 17-Aug-11 News -- New GDP reports put European economy at near standstill

New GDP reports put European economy at near standstill

Sarkozy and Merkel offer additional disappointments

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Generational Dynamics Web Log for 17-Aug-2011
17-Aug-11 News -- New GDP reports put European economy at near standstill