It is said of the frog that if you put it in boiling water, it immediately jumps out. If, on the other hand, you put the frog in cold water and then gradually heat the water to the boiling point, it eventually dies of overheating. Reading this morning’s European GDP numbers, one has to wonder whether the frog analogy might not be appropriate for those countries in the European periphery. For those countries’ economies now appear to be dying a slow death as they remain stuck in a Euro straitjacket that, combined with fiscal austerity, is condemning them to an ever deepening recession.
This morning, Eurostat released truly abysmal European GDP growth numbers. It reported that in the last quarter of 2012, the European economy as a whole contracted at an annualized rate of 2.4%, making this the third consecutive quarter of negative growth. Matters in the periphery were very much worse. A country like Italy declined at a 3.6% annualized rate in the last quarter of 2012, making it the sixth consecutive quarter of negative growth, and a country like Spain declined at a 2.8% annualized rate, making it the eighth consecutive negative quarter. Meanwhile, the Portuguese economy plunged at an annualized rate of 7.2%.
Sadly, the populations of the European periphery do not seem to realize that the underlying cause of their recessions is that they are being forced to undertake massive fiscal austerity within a Euro straitjacket at a time of a domestic credit crunch. Nor do they seem to grasp that the application of the very same policy mix of fiscal restraint within a Euro straitjacket in 2013 with an ongoing domestic credit crunch, in the context of a weaker external environment, will almost certainly lead to a deepening in their recessions. Instead, as indicated in a recent opinion poll, over 70% of the population in the European periphery still thinks that it is a good idea to remain in the Euro, seemingly oblivious to the rising temperature within that arrangement. This makes it all too probable that Europe will remain a strong headwind to the global economy for a long time to come.