Recession takes root in the euro zone

Dyed-in-the-wool fiscal consolidation policies weaken the economies of the single-currency bloc

The euro zone remains in recession. Output in the single-currency bloc has now declined for six quarters in a row, the longest contraction in growth since the euro came into existence. GDP in the area shrank 0.2 percent in the first quarter of this year on a quarterly basis after a fall of 0.6 percent in the previous three months, the European Union’s statistics office Eurostat confirmed on Wednesday.

The recession is gripping not only the so-called peripheral member states but has also extended to the Netherlands, Finland and France. Growth in Germany in the first three months of the year was a meager 0.1 percent.

If economic policies do not change significantly, the euro zone will remain mired in decline with the accompanying problems this entails in reducing unemployment, which is also at record highs. During times of peace, there has never been such a significant loss of welfare for the population and such a widening of the inequalities in the distribution of income. The consequence of this is disaffection with European institutions.

With good reason. Despite six years of crisis, the decisions taken by the European authorities and the most influential governments in the bloc, led by Germany, have failed to arrive at the formula need to unlock growth. Intransigent insistence on fiscal consolidation, far from strengthening the fundamentals of the euro-zone economies, has weakened them. Growth potential has been debilitated while the problem of imbalances in the public finances of the peripheral economies has not gone away.

The masters of Europe have paid no heed to the warnings of the IMF and a large majority of economists on the inappropriateness of imposing simultaneously, and on practically all of the economies in the euro zone, indiscriminate restrictions on all types of spending and public investment, accompanied by tax hikes.

Monetary policy shortcomings

For its part, monetary policy has only belatedly and partially offset the contraction in growth sparked by austerity policies. The European Central Bank still continues to analyze possible decisions aimed at reducing the funding asphyxiation of small and midsized companies in the economies of the south after having received ample confirmation that its interest-rate cuts have failed to adequately filter down to the economies in the euros zone. Peer companies bear much more onerous funding conditions in Spain and Italy than they do in France and Germany, while the business failure rate is much higher in the economies of the south than in the rest of the euro zone.

This is not exactly an economic scenario that favors the recovery of the banking systems in the area, this feeding the idea that lenders may have to be recapitalized again with taxpayers’ money. The absence of immediate stimulus measures, the high rates of unemployment and the fragility of the banking sector could eventually end up driving some economies, such as Spain’s, into a full-blown depression.

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