Counterparties: Austerity bites
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How long is Europe going to stay in recession, despite its experiment with austerity coming to an end some eight months ago? The European Commission today projected that the continent’s economy will shrink by 0.3% in 2013, its second straight year of contraction. In Spain and Greece unemployment will remain around 27% in 2013, with unemployment in the Eurozone as a whole rising to 12.2% from 11.4%.
Hale Stewart, diving into Europe’s dreadful manufacturing data, finds only one bright spot: Germany. “The bottom line is that all the ‘good news’ coming out of Europe right now is projection”, he writes.
Things are no sunnier in Italy, whose presidential election this weekend takes place against a backdrop of “stagnating economy, corruption, organised crime, political apathy, misogyny, youth unemployment”. Intrade gives current prime minister Mario Monti just 2.2% odds of holding onto his job. Joe Weisenthal notes another problem: Beppe Grillo, a comedian-turned-politician who wants to give every Italian an iPad, may get enough votes to prevent Italy from forming a coalition. “It’s hard to see Grillo’s movement as a source of stability,” one unnamed diplomat told Reuters.
So how did we get here? Paul Krugman spots a new paper from Paul De Grauwe and Yumei Ji that’s worth unpacking. Europe’s austerity movement started, in large part, because of worries around widening credit spreads in countries like Greece. Those worries, in some cases, were exaggerated: “Market sentiments of fear and panic first drove the spreads away from their fundamentals.” (The opposite effect happened when the ECB announced it’d do anything to save the Euro).
The sovereign debt market, it turns out, can be just as irrational and panic-driven as the stock market. This, the authors write, led to unnecessarily harsh budget cuts from Europe’s policymakers. Which of course only made matters worse. “The more intense the austerity, the larger is the subsequent increase in the debt-to-GDP ratio,” the authors find. — Ryan McCarthy
On to today’s links: