A Tale of Two Europes

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machinehead's picture
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A Tale of Two Europes

Europe's 2nd quarter GDP numbers are rolling in. Like a person with one foot in boiling water and the other in ice water, on average Europe's economy is doing just fine. Germany, in particular, is booming like crazy:

Aug. 13 (Bloomberg) -- Germany’s economy grew in the second quarter at the fastest pace since the country’s reunification two decades ago, driving faster-than-forecast expansion in the 16-nation euro area.

German gross domestic product surged 2.2 percent from the first quarter, fueling euro-area growth of 1 percent, the fastest in four years. [2.2 percent per quarter is 9.1 percent annualized, as U.S. GDP is reported.]


Meanwhile, caught in the leg irons of its IMF/EU austerity program, Greece is sliding into depression:

The country's ELSTAT statistics office estimated that second-quarter GDP fell by 1.5% during the three months [minus 5.9% annualized], and was 3.5% less than a year ago. 

The falls were also sharper than in the first quarter. So while many fellow European economies, including the UK, were enjoying a quickening recovery out of recession in the second quarter, Greece's first-quarter contraction of 0.8% [minus 3.2% annualized] almost doubled. 

Greek unemployment posted a record jump in May. According to labour market data from the statistics service, the unemployment rate rose sharply to 12% from 8.5% a year earlier.


What can we glean from this fire-and-ice scenario? For one thing, Germany is benefitting tremendously from euro devaluation. Its export industries -- autos; transport, electrical and medical equipment; optics; machine tools -- are booming. Euro devaluation gave Germany something better than an interest rate cut -- increased international competitiveness. 

With overnight interest rates having hit zero in the U.S and Japan, the lesson is that competitive devaluation is an alternative, and probably more effective, form of stimulus. Japan certainly could benefit from currency devaluation now. The US, as a trade deficit nation, would benefit less from a dollar devaluation. But with rate cuts off the table, the remaining choices boil down to 'QE II or Devalue' [Hey, it rhymes! Bumper sticker slogan!]

Greece, not being much of an exporting power, benefits only slightly from euro devaluation. Greece is cheaper for foreign tourists now, but transit strikes and threats of violence may have offset that advantage. Meanwhile, fiscal austerity has sent GDP, investment and employment plunging, even as fiscal deficits continue. So in a vicious 'scissors effect,' Greece's already excessive debt-to-GDP ratio is being pushed up from both sides: rising numerator, shrinking denominator -- as forecasted months ago.

Greece is on a long, miserable march toward restructuring, sooner or later. And sooner would be less traumatic than later. But the debt pushers won't listen. Y'all remember what Steppenwolf said about the 'pusher man' --


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