Thursday, June 28, 2012

European Economic Results Show Just How Well the Austerity Program is Working in Europe

It’s Working Well – If the Goal is to Reduce Economic Activity

The response in Europe to the Great Recession was to focus on deficit reduction by implementing a policy of somewhat higher taxes and large cuts in government spending.  The expectation was that by reducing deficits businesses and consumers would have the confidence they needed to increase spending and investment, and lo and behold economic prosperity would return.  How’s that working out, this headline in the WSJ answers that question.

Updated June 21, 2012, 4:14 p.m. ET

Business Activity Contracts Sharply in the Euro Zone

Want details?  Here are some details.

Business activity in the euro zone contracted sharply in June, a closely watched survey showed, underscoring the currency bloc's deepening economic malaise as it confronts an escalating debt crisis along its southern fringe.

Don’t like those details, here are some others.

Things were better than expected in the first quarter…but [orders] seemed to stop in the last two or three months," with weakness extending from Europe's weak periphery to faster-growing emerging markets such as China, said Ralph Wiechers, chief economist at VDMA, Germany's engineering association. "We are very cautious about the next few months."

Still unhappy, how about this?

Germany's PMI, which includes both manufacturing and services, slid 0.8 point to 48.5, suggesting the economy will struggle to grow this quarter. Manufacturing activity slid deeper into contraction, with that index falling below 45. A particular concern: New export business fell at its fastest pace in more than three years. France's PMI also remained below 50, at 46.7.

Germany, and to a certain extent France are Europe’s economic engines.  When the engines slow the trains has a lot of trouble increasing speed.

Thursday's PMI report only included details for France and Germany; other countries will report their June results in early July. But debt-saddled countries such as Portugal and Spain are showing no signs of stabilization after several quarters of contraction.

"April and May were the most difficult months we ever had," said José Gonçalves, owner of specialty elastics maker JPC Elasticos SA in Portugal's textile region. He has received some cancellation orders from clients in Spain, a key export market. Last month, Mr. Goncalves laid off 22 workers, bringing his workforce down to 34 employees.

The European policy of austerity is largely to blame here, as are the European leaders.  Okay, they took the chance on austerity, hoping that it would work.  That produces some criticism, but now that it is clear the policy is not working continuation of a failed policy merits extreme criticism.  That is what European leaders deserve and that is what they are going to get.  History will not be kind. 

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