The euro zone today – strikes, reform and recession

March 22, 2012

The euro zone economy looks to have contracted at a faster pace in March, according to the latest purchasing managers’ data, hours after ECB President Mario Draghi declared the worst of the debt crisis to be over. A mild recession appears to be in prospect with the probable exception of Germany.

The two aren’t mutually exclusive. Even if the existential threat to the currency bloc has passed, many of its members face years of economic hardship yet. With China’s equivalent report also coming in weak, the short-term signs are not auspicous.

Italy’s largest trade union has called a strike for the near future over Prime Minister Mario Monti’s labour reforms which have been rehardened to make it easier to fire not just workers in new jobs but right across the labour force. The prime minister says he won’t negotiate further given he has the support of other unions as well as employers groups. However, there is room for “fine tuning” today and tomorrow. The CGIL union has called for an eight-hour general strike with more to follow.

This is big stuff. A number of key factors have helped move the euro zone debt crisis on from critical to chronic; top of the list was the ECB’s creation of a trillion euros of three-year money but not far behind came the elevation of Monti and the hope invested in him that he can turn the Italian economy around. If the euro zone’s third largest economy fell over, the currency bloc really would be on the skids.

Monti must convince markets – which continue to give him the benefit of the doubt for now – that he can raise Italy’s trend growth rate if its 120 percent of GDP debt pile is ever to be eaten into.
If faith in the technocrat premier wanes, it could have a significant effect on currently benign investor sentiment towards the euro zone.

Today, bailed out Portugal also faces a general strike protesting at austerity measures which the government is doing its best to stick to, without much prospect that it will turn the economy around. Data on Wednesday, showed Portugal’s core public deficit nearly tripled in the first two months of 2012, showing a deepening economic slump is denting tax collection and stoking concerns it will  follow Greece in requiring more rescue funds. The difference is there is much greater euro zone goodwill towards Lisbon, so those funds will be provided without much grumbling.

Ireland, the country that seems to have a chance of riding the austerity wave successfully, produces Q4 GDP data which will show whether the government met its 1 percent growth target next year, while Germany continues to look like an economy on a different planet to its currency peers. It expects to balance its budget for the first time in more than 40 years in 2016 thanks to strong growth and full tax coffers.

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