This page has been archived and commenting is disabled.

Two Charts On The European Growth Dilemma

Submitted by Tyler Durden on 02/13/2012 16:38 -0400

As the Germans ponder the truthiness of Greece's planned austerity measures it will perhaps come as a shock to many that since the start of the Euro (Dec 1998), Greece (followed closely by Spain and Ireland) has experienced the highest nominal GDP growth rates (rebased to USD) among a sample of large global economies (ex-China). As Deutsche Bank's Jim Reid points out from this surprising fact, these three nations (and to a lesser extent Portugal) have been major beneficiaries of the Euro and have seen their economies improve their international wealth position at a faster rate than their developed market peers since 1999. Typically, over the medium- to long-term, Reid notes the relative size of economies will reflect international competitiveness and productivity - so have Greece, Spain, and Ireland been the most competitive and most productive Developed World economies over the last decade or so? In short, no.

The decade-long strength of the Euro (along with the constraints of being tied in to too high an exchange rate) as well as a ramping up of leverage makes these weaker countries look far wealthier internationally than they otherwise would be (and markets reflect this uncertainty). In the current environment, post the leverage super-cycle, this creates stress (as is all too obvious) and in the medium-term we would expect mean-reversion of this 'fake' wealth/growth.

The dilemma is whether the peripheral nations see large and negative GDP growth to revert down or if Germany is willing to accept far higher growth and inflation (maybe 7% nominal) to adjust upwards to the seemingly unsustainable levels of the peripherals. Austerity versus Growth/Inflation. It seems from Ireland's suffering and Greece's slide that the former (peripheral deleveraging and austerity) is the path chosen for now though ongoing appetite (Papademos/Samaras aside) for this seems as unpalatable as German's accepting socialized losses via firewall and the specter of high inflation.

The problem - over-levered and exchange-rate anchored peripheral nations have experienced international wealth creation that is implicitly unreal and unsustainable...

...and the dilemma - needs to revert to more Euro-zone sustainable fiscally-compact levels (read Germany) which as we see above is being undertaken by Ireland in a dramatic (and painful) fashion and is occurring increasingly painfully in Greece.

Does Germany revert 'up' or peripherals revert 'down'? It seems neither side is in any way comfortable with the timing or fundamentals of what this means as should peripherals start to see more negative growth, then debt sustainability once again becomes questionable and the vicious circle begins.

- advertisements -

Mon, 02/13/2012 - 16:40 | 2154985 navy62802

Slow news Monday ...

Mon, 02/13/2012 - 16:48 | 2155011 MillionDollarBonus_

It's not good enough for European leaders to solve this crisis on their own. They need expert advice from veterans of the financial industry, who know how to promote growth and can advise on suitable policies to tackle Europe's problems. Top financial firms like Goldman Sachs, HSBC, Credit Suisse, Morgan Stanley and other top tier investment banks (also known as Bulge Brackets) would be the first place to look. Government needs to work WITH big business to devise comprehensive solutions to economic problems.

Mon, 02/13/2012 - 16:53 | 2155036 Harbanger

Citizens need to create Governments that devise comprehensive solutions.

Mon, 02/13/2012 - 16:58 | 2155059 Conrad Murray

Governments don't create solutions, markets do. People need to stop being dependent on The State.

Mon, 02/13/2012 - 17:14 | 2155129 Harbanger

Really? I was hoping I wouldn't have to worry about it. I'm lucky at that market thing, it's a trust issue for me. Dependents? I want to enpower them enough to know that we all depend on each other.

Mon, 02/13/2012 - 23:41 | 2156354 Breaker

"Citizens need to create Governments that devise comprehensive solutions."

It's been tried. Hitler and Stalin both failed.

I suspect your post is parody. But it could be self-parody.

Mon, 02/13/2012 - 17:08 | 2155103 ParkAveFlasher

Thanks MDB. Please send me a prospectus and include my 3-day (2-night!) vacation voucher.

Mon, 02/13/2012 - 17:16 | 2155137 Schmuck Raker

AMEN, Brother Bonus.

"Say it loud: Technocrat, and proud!"

I wanna testify!

Mon, 02/13/2012 - 16:50 | 2155021 SheepDog-One

Slow news Monday perhaps....but its all GOOD news of course!

Mon, 02/13/2012 - 16:43 | 2154992 lolmao500

Damn Ireland sure kicked asses till 2007. All hail Keynesianism!

Mon, 02/13/2012 - 16:50 | 2154993 Manthong

Ah, nothing that a tsunami of liquidity can't sweep away. and they'll need it.

FEBRUARY 13, 2012, 3:10 P.M. ET

UPDATE: S&P Downgrades 15 Spain-Based Banks 1 Month After Spain Downgrade

http://online.wsj.com/article/BT-CO-20120213-712704.html

Mon, 02/13/2012 - 16:52 | 2154996 LouisDega

Charts! Charts! Thousands of them..... Millions of them!!

Mon, 02/13/2012 - 16:46 | 2155006 SheepDog-One

Isn't 'growth' really 'how can us bankers get richer'?

Mon, 02/13/2012 - 16:54 | 2155030 navy62802

Growth = velocity of money creation = d(M3)/dt.

:-P

Mon, 02/13/2012 - 16:47 | 2155007 docmac324

Enough of the charts, bears damnit, bears are what we want...

Mon, 02/13/2012 - 16:50 | 2155015 SheepDog-One

'Wealth creation' BS, all just an illusion. And the 'wealthiest' today dont produce anything, nothing of 'growth' there except they're just the most privileged criminals around.

Mon, 02/13/2012 - 16:54 | 2155038 Tsar Pointless

You mean like Donald Trump and Mitt Romney?

And all of the people who earn billions while doing "God's work" on Wall Street?

Surely you jest. We need to make one of them president, goshdarnitall!

/Pointless and sarcasm off

Mon, 02/13/2012 - 16:51 | 2155024 Greenhead

The problem with GDP is that it includes govt spending. So, borrowing out the kazoo and distributing the money to govt functionaries is now called growth??? Stupid article.

Mon, 02/13/2012 - 17:06 | 2155082 Zero Govt

the problem with GDP is not only it includes Govt spending but it doesn't quantify, at all, the actual real productive wealth a country is producing (or not)

many businesses are only in biz courtesy of the tax code 'subsidising' debt loaded enterprises (while penilising/demoralising profitable ones who take on no debt), others are crones of State (spending) like education or road building, others such as Insurance, Banks or Utilities propped up for their existence by Law (you have to get your house or car insured under Law)

there are vast swathes of the economy that are economic zombies and for the Grim Reapers chopper when the State sinks (as it always without fail does)

which'll leave standing the truly productive wealth producing enterprises ..and economists wondering where the hell all the GDP went!

Mon, 02/13/2012 - 16:57 | 2155053 Schmuck Raker

The problem - over-levered, ALL nations have experienced [] wealth creation that is implicitly unreal and unsustainable...

/fixed

Mon, 02/13/2012 - 16:58 | 2155062 toadold

Uhmmmm, "Gold hyndinnen!"

Mon, 02/13/2012 - 16:58 | 2155063 cranky-old-geezer

In America inflation is running about 10% a year.

So you need 10% GDP growth just to stay even with inflation. That's NO real growth, just treading water.

Wall Street expects 2% GDP growth this year, which means -8% real GDP adjusted for inflation.

Of course 2% GDP growth is nonsense. Prices are rising 10% - 12% a year. Since GDP is measured in price of goods & services, we actually have 10% - 12% GDP growth.

But none of it is real growth. We have no real growth in the economy. Just rising prices.

Mon, 02/13/2012 - 17:01 | 2155075 Tsar Pointless

It's merely "supply-side" (aka "voodoo") economics run amok.

Nothing more, nothing less, but pointless nonetheless.

Mon, 02/13/2012 - 17:20 | 2155151 onebir

"Wall Street expects 2% GDP growth this year, which means -8% real GDP adjusted for inflation."

That's real GDP, I think. You have to add back the inflation measure that's already been deducted from growth in money GDP before subtracting your own estimate for inflation.

In fact the relevant measure of inflation for GDP is called the GDP deflator. I don't know if it's been changed/manipulated as much as the CPI figures. It's less widely quoted, so less politically important, and some of the inflation changes (eg hedonic price indices) don't seem relevant for GDP measurement, so I doubt it.

But I wouldn't be surprised if GDP growth was pretty close to zero...

Mon, 02/13/2012 - 17:48 | 2155299 cranky-old-geezer

Maybe they're saying -10% real growth and 12% price increases, netting out to 2% GDP growth.

10% slowdown in the economy per year. That's sounds about right.

Mon, 02/13/2012 - 17:04 | 2155078 Rynak

If you have to use useless GDP numbers, at least anchor them to real inflation. Oh, and, please account for the "exchange rate"-assrape during the introduction of the euro.

How does that "growth" now look like? Like an "inverse bang"?

Mon, 02/13/2012 - 17:13 | 2155113 Caviar Emptor

Biflation will kill any chance of true (organic) economic expansion.

The consumer society will sink in the quicksand of deflating incomes, social mobility and household net worth. Small business will die on the vine to be replaced by state-backed private monopolies (which will emerge from today's mega-big box corps). Cost of living and conducting business will spiral as margins contract.

There will be a rift between the haves and the have-nots bigger than ever seen in the last 300 years. It won't just be between the periphery and the core in Europe. It will be throughout the devloped world including the US.

The only forces preventing social collapse will be a fraying social safety net combined with bulging military intelligence, mega-law enforcement and over 10% of the population in prison

Mon, 02/13/2012 - 17:41 | 2155255 cranky-old-geezer

Yes, government is actively prepairing to deal with civil unrest caused by incomes not growing and cost of living growing 10% - 12% a year.

The 2% estimated GDP growth number is bullshit of course, but it's done to keep the sheeple from rioting. If sheeple believe cost of living is rising only 2% a year they won't feel so bad about their measly 1% raise, or no raise at all.

It's also done to keep social security COLA down. SS receipients get 1% - 2% while prices are rising 10% - 12%.

This can't go on much longer. Sheeple are waking up and realizing 2% is just another government lie. They go to the grocery store and see 10% - 12% price increases, even 15% in some cases.

Sooner or later sheeple aren't gonna be able make ends meet. It's inevitable.

A friend is about to lose his house. He can't keep up the mortgage payments anymore. He says property taxes & untilities (and groceries) have doubled over the last 3 years, but his pay has grown 3% a year. He just can't keep up anymore.

Fortunately I'm self-employed, I've raised my rates 80% over the past 4 years. Yea I'm not totally keeping up, but I'm closer than most folks.

Mon, 02/13/2012 - 22:23 | 2156196 MarketWatchTerrorist

You talk as if this isn't according to plan.

Mon, 02/13/2012 - 17:19 | 2155146 adr

Wow those charts look just like the USA 1970-2007. Expansion of debt to create GDP growth. Just like a guy that loaded up on 100 credit cards to buy a luxury car, $10k wardrobe, rolex watch, and a lot of other pricey stuff. For a while he looked great, until the bill finaly came due.

Mon, 02/13/2012 - 22:25 | 2156202 MarketWatchTerrorist

Buy it all using credit cards then tell the banks that issued them to go fuck themselves and dare them to find you in South America or Eastern Europe.

Mon, 02/13/2012 - 17:21 | 2155159 agent default

Yeah right growth, growth and moar growth is the solution to everything. If anybody pointed out that natural resources are finite, and global population is at 7B and growing, would that make you think twice about this new age economic theory bullshit? There is no way anybody can "grow" out of this debt hole. Unless you count money printing as growth.

Tue, 02/14/2012 - 09:39 | 2156977 kindape