For months, I’ve been arguing that the simultaneous implementation of fiscal austerity programs by eurozone governments would backfire, resulting in a worsening of the sovereign debt crisis. European economic data released today indicates that this prophecy is starting to be fulfilled. To escape this crisis, Europeans are selling euros, buying dollars, and using the dollars to buy U.S. government securities. As long as this persists, our interest rates will remain at historical lows, our interest expense as a percent of GDP will remain low, and we will not have a sovereign debt crisis. This provides us with the ability to implement a very sizable fiscal stimulus program. But the political realities are such as to preclude such a program. Instead, we are proceeding down the road of fiscal austerity. We are blowing what may be our last chance to reverse the downward momentum in our economy.
From this morning’s Wall Street Journal (no link):
The prospect of Europe falling back into recession came a step closer Thursday following the latest batch of dire economic data.Financial data company Markit said its preliminary survey of purchasing managers in the 17-nation euro zone fell into contraction this month, with a reading of 49.2—below the 50 threshold that denotes expansion. That is the first monthly decline in activity since the euro zone climbed out of recession in the third quarter of 2009.
The figures indicate Europe’s private sector is retrenching at the same time as governments in many countries are slashing their expenditures in a bid to cut debt levels and ward off a long-running sovereign debt crisis. Business activity in Germany, Europe’s biggest economy, slowed to a near-standstill. Its preliminary composite Purchasing Managers’ Index fell to 50.8 from 51.3, the lowest reading in more than two years and the eighth straight month of slowdown. Germany’s manufacturing sector slowed to a reading of 50 from 50.9. Any further slowdown next month would mean that industry, crucial to Germany’s export-based economy, was now in decline. The services index fared only slightly better, dropping to 50.3 from 51.1.
The same topic, as reported by the Financial Times:
The eurozone economy is on the brink of recession, according to a closely-watched survey showing private sector activity contracted this month for the first time in more than two years.
The worse-than-expected deterioration in eurozone purchasing managers’ indices adds to evidence that the region’s recovery has gone into reverse. It increases pressure on the European Central Bank to cut interest rates.
Economic prospects have been hit by sharp falls in consumer and business confidence amid the escalating eurozone debt crisis, as well as fiscal austerity measures across the continent and gloom about US growth. Adding to the gloom, eurozone new industrial orders tumbled by 2.1 per cent in July compared with the previous month – suggesting production would also slow in coming months. June saw a 1.2 per cent fall, according to Eurostat.
The “composite” purchasing managers’ index, covering services and manufacturing, dropped from 50.7 in August to 49.2 in September, falling below the 50 level which divides expansion from contraction for the first time since July 2009. With the index regarded as a reliable indicator of growth trends, the latest readings suggested Germany and France – the eurozone’s two largest economies – had seen growth almost stagnating in September, according to Markit, which produces the survey.