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Economy in Brief

EMU GDP Growth Tops Out
by Robert Brusca   November 12, 2010

Biz Cycle mechanics 101 - Trees do not growth to the sky and GDP growth does accelerate endlessly, even in recovery. But in EMU all the key larger early-reporting countries reported a deceleration in GDP growth in Q3 compared to Q2 save one. That one was Greece where GDP fell at an annual rate of 'only' 4.4% in Q3 compared to a pace of decline of 6.7% in Q2. Gee, I feel better already! Those numbers do not make it much of an exception to the 'rule' that, in EMU, things were weak if not weaker in Q3. For all of EMU growth slowed to a pace of 1.5% from 3.9% previously. Germany had a lot to do with that as its annualized quarterly rate of growth plunged from an outsized 9.5% to a still-firm 2.8%. But as the table shows it was not just Germany but virtually everywhere that growth was either weak or weaker.

Reaping what you sow; then sewing what you tear- Amid a surging growth rate of 9% Germany pressed the earlier G-20 summit for a tilt to austerity and won backing largely because the US was weakened and was represented by a President unskilled in those sorts of negotiations. Also Germany had a powerful European alliance for its agenda having backstopped financially the bulk of the plan to provide a safety net for beleaguered European sovereign borrowers. This fact earned it support. We also can think of this as the golden rule in action: he who has the gold, makes the rules. Fiscal conservatives believe there is no such thing as a bad time to implement financial prudence. But one does not have to be a dyed-in-the-wool Keynesian to see the risk of implementing austerity before economies escape the grip of recession. It's a bit like firing a missile's braking rockets well before it has escaped the earth's gravitation pull or closed in on an altitude suitable for sustainable orbit, oops!

Europe's source of growth is...? So growth in Europe is in retrograde motion and the question is about that motion. For planets, retrograde motion is the appearance of a celestial body moving backwards when it really still is in an advancing orbit. Is it really retrograde motion in Europe, only seeming to backtrack but later set to pick up, or is the backtracking authentic and more worrisome? Has austerity put sustainable recovery at risk in Europe? We can't tell as yet without the GDP details. But evidence from sporadic country-level reports suggests that export led growth has been a big factor in Europe's turnaround. Domestic demand does not appear to have been rekindled. So the implementation of austerity would seem to make domestic-sourced growth harder to achieve and to place more demands on export-led growth which is something everyone seems to want to do these days. No wonder the G-20 meeting was such a mess!

What are markets saying? What we can say is that the exchange market seems to have shifted its view from fear of what the US QE-II will do to/for the dollar to a fear of what Euro-debt will do to the value of the euro. The dollar is mixed in today's trading but the with Ireland's new troubles (well, re-emerged old troubles) and ongoing difficulties in Portugal, with Greece still beleaguered and Spain struggling there are no shortages of issues to worry about in Europe (hey, let's throw France and Italy in the mix too!). Working your way out of a debt problem often means being more frugal, but growth can work wonders too. Austerity costs countries growth near term but may raise the potential for growth in the future. But that is only true if the austerity does not snuff out the incipient recovery. For now while worries of a double dip in the US have been submerged by all but the most pessimistic (or headline-seeking economists), Europe seems to be engaging that risk.

Expected strain from weak growth's refrain - It's a troubled time for global growth but that is more or less what we expect when growth sinks so synchronously around the world. Having a suddenly smaller pie which also is slower-growing puts past trends and practices to the test. What we thought we had learned in the wake of the financial crisis was that we could not go on like this. Forming the G-20 to replace the G-7/8 was one supposed step. But now we find out that quitting bad habits for nation-states is as hard as it is for individuals who try to quit smoking or to go on a diet. Changing behavior is hard. Every G-19 participant wanted to convene and end the G-20 on the notion that the US QE was the divisive issue but it was not.

The aim of QE and the fallout - The US policy of QE was aimed at spurring US growth. One aspect of it was that the dollar fell the falling dollar was not the centerpiece of that policy, but it might have been a consequence. If anything we can argue that QE finally unleashed real competitive market forces and swept rigidities from the market. Maybe it also happened because, with China's fear of inflation, it can't be as bold in pegging the yuan anymore.

How markets SHOULD work - The US has a large current account deficit it's currency IS SUPPOSED TO BE WEAK. That the G20 does not see this is evidence of how little this group has gelled or even tried to see what global approach works instead of coming to a meeting with 20 different agendas. QE is supposed to keep US growth alive. If that is to happen the dollar has to drop to contain the US current account deficit which is large and would otherwise balloon even more. That is a policy that is consistent and does not represent a competitive devaluation of the dollar; it is an intrinsically defense move not an offensive move, if economic events can be so categorized. The dollar reflects logical market behavior.

Ask not what the world economy can do for you: What contributions are other nations making to global needs beyond showing up hat in hand and complaining they are not being favored by market (exchange market?) developments? How about none? This is why the G-20 was a failure. It's not because it did nothing. It's because it came together without a plan to do anything! So, of course, it achieved nothing. The meeting was in Asia and results were very Zen. What do you want of the G-20 Nothing? OK, here it is! Most g-19 members came with a plan to oppose the US which is the only country with a real consistent world view, not a view that only projects US values onto others. Like it or not that statement is true.

Demon Uncle Sam: It is a multilateral world. It's time for new thinking and cooperative acting. The US will never make deficit progress is if has to keep growing strongly and if the dollar can't fall because everyone else 'wants to export'. The US consumer has been tapped. He has been overly lent to. His has tapped and drawn out a good deal of this wealth- wealth that is gone for good. If we do not learn a lesson from this and instead just try to do it again, and again…shame on us. This way is shut. Will the G-20 realize it in time and find the real demon to exorcise or is the US the US just too convenient in that role regardless of who is President? Is this just another habit that is just too hard to break?

Euro-Area And Main G-10 Country GDP Results
  Quarter Over Quarter-Saar Year/Year
GDP Q3-10 Q2-10 Q1-10 Q3-10 Q2-10 Q1-10 Q4-09
EMU 1.5% 3.9% 1.4% 1.9% 1.9% 0.8% -2.0%
France 1.4% 2.7% 0.8% 1.8% 1.6% 1.1% -0.5%
Germany 2.8% 9.5% 2.3% 3.9% 3.9% 2.1% -2.0%
Greece -4.4% -6.7% -2.5% -4.5% -4.0% -2.7% -3.2%
Italy 0.7% 1.9% 1.7% 1.0% 1.3% 0.5% -2.8%
The Netherlands -0.4% 3.6% 1.9% 1.9% 2.7% 0.4% -2.4%
UK 3.3% 4.6% 2.1% 2.8% 1.6% -0.2% -3.1%
US 2.0% 1.7% 3.7% 3.1% 3.0% 2.4% 0.2%
Japan #N/A 1.5% 5.0% #N/A 2.4% 4.4% -1.4%
Switzerland #N/A 3.5% 4.2% #N/A 3.4% 1.9% -0.1%
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