Berlin's European Recession

"On the Right Path"

Germany is continuing to impose disastrous economic austerity measures all over Europe. Top German politicians and officials relentlessly plead for the continuation of the austerity policy, undeterred by the erupting recession in areas of the Euro zone. The policy became binding for almost all EU member countries through the signing the Fiscal Pact on March 2. As German Finance Minster Wolfgang Schäuble declared March 6, by signing the Fiscal Pact, Europe is on the "right path."[1] Indicating the Czech Republic and Great Britain, both of which refused to sign the treaty that will slowly erode national sovereignty, he added that he hoped all EU members would soon sign up for the Pact, which Berlin substantially formulated. On March 13, Federal Bank President Jens Weidmann called for the southern Euro countries, which are currently slipping into recession, to apply "stiffer reforms" and additional austerity measures.[2]

Recession in Spain

The situation in Spain has been dramatically worsening since the rightwing government of Prime Minister Mariano Rajoy came to power and pursued a strict austerity policy. Because of austerity measures already adopted, the country's economic output shrank by 0.3 percent in the fourth quarter of 2011, as compared to the preceding quarter. The Rajoy government is anticipating a deepening of the recession this year, which could lead to a 1.7 percent contraction of the economy. In February, Spain had the highest unemployment rate in Europe, with an official rate of 21.2 percent. Youth unemployment has even risen to 46 percent. By comparison, before the crisis began in mid 2007, the unemployment rate south of the Pyrenees had been around eight percent and the youth unemployment rate around 15 percent. As in Greece, the Iberian Peninsula's economic downturn has been provoked by a slump in domestic demand due to the austerity measures. Last January, Spanish retail sales dropped by 4.8 points below last year's level for the same period. The real drama of this collapse can only be seen from a long-term perspective: Compared to March 2007, Spanish retail sales even dropped 23 percent.

Continue to "Save"

The worsening economic situation forced the Rajoy government to put into question the EU imposed austerity plan. Originally, the Spanish government had planned to reduce the 2011 budget deficit of 8.5 percent to 4.4 percent. But as the recession picked up momentum, the prognosis for the Spanish deficit rose to 5.8 percent. Following last Monday's controversial negotiations in Brussels, Madrid was granted a slight increase in the deficit ceiling to 5.3 percent under the condition of committing itself to an even greater cutback of 0.5 percent of the GDP. Spain must make "greater consolidation efforts," demanded Jean-Claude Juncker, the chief of the Euro group and reiterated that from 2013 on, the country has to push its budget deficit below the limit of three percent of the GDP.[3]

Downturn in Italy

The downturn, having begun already in the second half of 2011, is also accelerating in Italy. Even the EU Commission is predicting that the economy south of the Alps will shrink by 0.7 percent in the first quarter of 2012 from the previous quarter. This prediction could prove too optimistic. Already the most recently announced slump in Italian industrial production fell 2.5 percent of the preceding month, three times more than experts had predicted. Italy's technocratic government, led by Prime Minister Mario Monti and imposed by Angela Merkel and Nicolas Sarkozy, has also pushed through austerity programs including value-added tax increases, retirement pension reductions and a further deregulation of the labor market and, these measures, as seen in Greece, lead to a breakdown of domestic consumption demand. Therefore new car registrations fell by 18.9 percent in February, which incidentally also affects products produced in Germany or German producers such as Audi (- 35%), Mercedes (-14%) and Opel (-40%). By December, Italian retail sales had fallen relatively modestly - 6.3 percent in relation to the high in February 2008. But this could also quickly change with the impending implementation of the austerity measures, such as additional increases in the value-added tax.[4]

Portugal is Crashing

Portugal has been particularly hard-hit by the austerity measures imposed by Brussels and Berlin, which have greatly accelerated the recession. In the third quarter of 2011, the Portuguese economy dropped by 0.6 percent from the previous quarter and in the fourth quarter it was already down 1.3 percent. According to diverse predictions, this impoverished country is expected to decline from 3.3 to 6 percent.[5] Portugal's unemployment rate has risen to 14.8 percent, while the rightwing government of Prime Minister Pedro Passos Coelho is doing everything possible - including mass layoffs and wage cuts in the public sector and hasty privatizations - to reach the targeted 4.5 percent deficit level for 2012, despite the recession.

On the way to the Third World

Where this austerity policy, imposed by the German government on Europe, will lead, can be seen in Greece's dramatic crash, which can literally be characterized as Greece saving itself to death. According to all predictions, in 2012 the country will remain in its fourth year of recession and continue to approach the economic level of the third world. The German business press predicts that if Greece's economic contraction continues, it will be bypassed by countries such as Vietnam or Peru. A deeper recession could even saddle Greece with a GNP, in terms of buying power, lower than the GNP of Bangladesh. The German edition of the Financial Times speaks of a "historically exceptional" economic collapse. "Some experts fear that the GNP for 2012 will again decline up to eight percent, after an approx. 6.5 percent drop in 2011. This is "the worst recession that a western country has encountered since the war," explains Barry Eichengreen, an economic historian at the University of Berkeley.[6]

Backlash on Germany

In the end, Germany's export industry will not escape the downward trend in the Euro zone, despite its growing exports to so-called threshold countries. EU countries' orders coming in for the German industry are dramatically diminishing. The business press reports, "already since the middle of the year, the quantity of new orders from countries of the monetary union has declined consistently, since the debt crisis resurged in the summer." "A demand for German products has decreased also" in other countries, "due to their austerity measures."[7] Berlin's austerity dictate is ultimately threatening to push Germany's export dependent economy into a recession. Like the populations in Greece, Portugal, Spain and Italy today, the German population will most likely have to confront drastic austerity programs.

Further reports and background information to the Euro Crisis can be found here: The Germanization of Europe, From the Crisis, Into the Crisis, The Value of the Euro, On a Collision Course (II), Europe, the German Way (II), Now German will be Spoken and An Imperial System.

[1] Germany Fin Min: EU On "Right Path" With Fiscal Compact; online.wsj.com 07.03.2012
[2] Weidmann fordert härtere Reformen von den Eurostaaten; www.focus.de 13.03.2012
[3] Eurozone knöpft sich Spanien vor; www.handelsblatt.com 12.03.2012
[4] Europas Sorgenkinder; www.handelsblatt.com 23.02.2012
[5] Europa spart sich in die Rezession; www.ftd.de 15.02.2012
[6] Dramatischer Wohlstandsverlust in Griechenland; www.ftd.de 13.03.2012
[7] Euro-Krise peinigt deutsche Exporteure; www.ftd.de 13.03.2012