The European Commission’s take on Europe

The European Commission has released its Interim Report on the current economic challenges in Europe. In its Overview it stated some things I’ve noted here previously:

The EU is set to experience stagnating GDP this year, and the euro area will undergo a mild recession. Several factors weigh on the outlook for the EU economy more heavily than forecast last autumn. In particular, the growth momentum seen at the end of 2011 has weakened more than previously expected, while the global economy has softened. Moreover, negative feedback loops between weak sovereign debtors, fragile financial markets and a slowing real economy do not yet appear to have been broken. Financial markets, however, are displaying signs of stabilisation, and some soft and hard indicators point to a more positive outlook. Member States have adopted additional measures to pursue necessary fiscal consolidation as the sovereign debt crisis in some euro-area Member States lingers on, although this is likely to weigh on growth perspectives in the short run.

I think this is a description of the Triffin Dilemma Weaponized as I’ve discussed elsewhere. What is particularly disappointing is to observe attempts to shift massive debts from the private to the public sector, accomplishing nothing in the long term, in a system that you know is structurally an ineluctable failure. Europe is not in a strong enough position to pull off the jinkies the U.S. has:

The temporary weakening of global demand expected in the autumn forecast is ongoing, though with substantial differences across regions. Among the advanced economies, the US has recently shown signs of moderately stronger growth than forecast in the autumn, as the labour market improved and consumption rebounded. In Japan, by contrast, the economy has ended 2011 on a weak note, although the perspective of moderate growth in 2012 remains intact. Many emerging market economies have been affected by the crisis in Europe through weaker exports and reduced capital inflows. Moreover, oil prices have not continued the measured decline expected in the autumn, but have rebounded by 13% in euro terms since the autumn forecast. Overall, and broadly in line with the autumn forecast, global GDP and world trade growth, having weakened since spring 2011, are expected to recover only gradually in 2012.

I note that the discussion of capital inflows relates to the Triffin Dilemma and Europe’s bid to attain reserve currencty status for the Euro, which we discussed here and here. I suspect that the so-called “temporary weakening of global demand” is directly related to the considerable loss of wealth in capital outflow countries. It cannot be stated with certainty, but this could be the tocsin of the global decline discussed in the articles referenced supra. Further in the report, the Commission proffers an estimate for growth:

GDP growth for 2012 is now expected to be zero for the EU and -0.3% for the euro area. This is a downward revision compared to the autumn 2011 forecast of 0.6 percentage point and 0.8 percentage point, respectively. The quarterly profile has been lowered for all quarters, most strongly around the turn of the year, in view of the weaker-than-expected flash estimate by Eurostat for the fourth quarter of 2011. A recovery is still forecast for the second half of the year, but is expected to be more modest and to occur later than forecast in the autumn. This reflects a more gradual return of business and consumer confidence, and therefore investment and consumption, as well as additional fiscal consolidation in a number of Member States.

The only thing that especially concerns me about this forecast is the likelihood that it is an understatement. I know this because that is what past experience has shown with the European political establishment. The bleed must be stopped as soon as possible.

The EU Member States should take immediate action to enable symmetric financial public policy across all their members. This should be federal in design and, of course, I advocate a General Federalist system. Short of that, symmetry must be achieved immediately and fiscal policy enforced at a federal level. This entails a considerable strengthening of the EU’s political Union as an absolutely necessary exigible of survival.

– kk


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