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Economy in Brief

EMU GDP Drops Sharply
by Robert Brusca May 15, 2009

The EMU region’s sharp drop in GDP has turned out to be worse than expected for the region as well as for most countries. Germany is showing the deepest GDP drop since 1970. The drop that The Netherlands is experiencing is the sharpest drop in GDP since the end of WWII. Greece is the sole county in this table with positive growth yr/yr.

GDP continues to decelerate across Europe. We knew these GDP reports would be weak after viewing the weakness in industrial output ahead of the release of this GDP report. Germany’s Q1 decline is so large it is not looking for much if any further decline in GDP for the rest of the year.

The Swedish Finance Minister Anders Borg has said that Europe may be in need of some further stimulus. Of course Europe also labors under the constraint of the Maastricht rules that restrict fiscal deficits and cap ratios of government debt to GDP. Not only does Europe lack a central fiscal authority comparable to its central bank, but the fragmented nature of fiscal responsibility makes it hard for Europe to be involved in fiscal stimulus in a coordinated way. Instead of a central fiscal authority the Maastricht rules stand in to restrict individual nations from going overboard with fiscal policy actions that could create too many government liabilities that might undermine the value of the euro. Of course recessions naturally put pressure on Maastricht rules since growth slows or declines, pushing tax revenues down at a time that social safety new spending rises. Countries that have room under the Maastricht ratios can engage in fiscal stimulus in times like theses, but often it is the high debt countries that are in greater need of the stimulus and must risk running afoul of the rules if they act.

This down turn has exposed problems in the Euro Area. The Euro Area is asymmetric. Its Central Bank has a mandate for price stability only. Meanwhile there is no fiscal authority to step in when things get tough. In this cycle the ECB actually joined in on an coordinated international rate cut with its inflation rate well over ceiling on the basis of a forecast that inflation would drop (of course the spot oil price had dropped sharply and that was not a very risky forecast at the time). Still it was an action that seemed to violate the rule if not the spirit of having and inflation ceiling. Europe has not been able to confront the problem that only the ECB can move fast in a crisis yet its mandate is price stability.

After seeing these GDP reports markets did not react very strongly. The weakness in GDP was expected. The degree of weakness has turned out to be a bit worse than expected. It sill is not clear what steps Europe will take next and if more fiscal stimulus will be part of the approach or not.

Euro Area and Main G-10 Country GDP Results
  Quarter over quarter-SAAR Year/Year
GDP Q1-09 Q4-08 Q3-08 Q1-09 Q4-08 Q3-08 Q2-08
EMU-15 -9.6% -6.3% -1.0% -4.6% -1.5% 0.6% 1.4%
Austria -8.5% -2.6% -1.3% -4.6% 0.3% 1.8% 2.3%
France -4.7% -5.7% -0.7% -3.2% -1.7% 0.1% 1.0%
Germany -14.4% -8.6% -2.1% -6.9% -1.8% 0.8% 2.0%
Greece -4.6% 1.2% 1.5% 0.3% 2.4% 2.7% 3.4%
Italy -9.4% -8.3% -3.2% -5.9% -3.0% -1.3% -0.3%
The Netherlands -10.7% -4.7% -1.8% -4.5% -0.8% 1.8% 3.4%
Portugal -5.9% -6.2% -0.8% -3.0% -1.8% 0.4% 0.6%
Spain -7.0% -3.8% -1.2% -2.9% -0.7% 0.9% 1.8%
UK -7.4% -5.9% -2.8% -4.2% -2.0% 0.4% 1.8%
US -6.1% -6.3% -0.5% -2.6% -0.8% 0.7% 2.1%
Japan #N/A -12.1% -1.4% #N/A -4.3% -0.2% 0.5%
Switzerland #N/A -1.2% -0.3% #N/A -0.1% 1.3% 2.3%
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