As the Situation in the Eurozone Only Worsens, the Concept of Austerity Has Proven a Bad Idea

Spain, the fourth-biggest economy in the eurozone, is showing us how troubles in the common-currency eurozone region are far from over.

The gross domestic product (GDP) of Spain contracted another 0.5% in the first quarter of 2013 from the fourth quarter of 2012, when it declined 0.8%. (Source: Bloomberg, May 30, 2013.) The Organization for Economic Cooperation and Development (OECD) just slashed its forecast for the Spanish economy and expects the unemployment rate in this eurozone nation to increase to 28%.

And adding to the worries…

The European Central Bank’s (ECB) assessment of the financial system in the eurozone suggested that due to the sharp economic slowdown in the region and a hike in bad bank loans, the risk of a further banking crisis is brewing. The ECB also commented that the weakest world banks were in the eurozone nations that have high unemployment and the most stressed housing markets. (No kidding!) (Source: New York Times, May 29, 2013.)

But it’s not just the small eurozone countries that are suffering; financially larger nations are experiencing an economic slowdown as well. Germany is begging for growth, and France is in a recession!

And austerity is failing miserably throughout Europe.

Consider Portugal, for example; it is experiencing a severe economic slowdown, and it expects to see its GDP contract in 2013 for the third straight year. This eurozone country has met all the requirements asked by those who bailed the nation out with more than $100 billion in cash. But exports to the country aren’t growing as much, and local demand hasn’t recovered. (Source: Wall Street Journal, May 27, 2013.)

The president of Portugal’s Supreme Court of Justice recently warned that the gap between the poor European nations and the richer ones will continue to widen unless Portugal and the other southern eurozone countries leave the common-currency region.

Note: there are political parties in countries like Portugal and Cyprus that have changed their opinions regarding their eurozone membership. Others in Italy want a referendum, two smaller parties in debt-infested Greece want out of the eurozone, and Germany is witnessing the rise of an anti-euro political party.

I realize I’m one of the few economic commentators who keep going back to these problems in the eurozone. I focus on them often because the eurozone troubles are not only unresolved and far from over, but they are also representing a huge risk to the global economy and, of course, a large risk to the U.S. economy. Many economists and the market in general are underestimating the repercussions of the eurozone mess.

What He Said:

“When I look around today, I see falling stock prices… I see falling house prices…and prices falling for retail goods stores. The media has it all wrong blaming (worrying about) inflation. In my opinion, the single biggest threat to the U.S. economy and to the Fed in 2008 is deflation. You can bet the Fed will expand the money supply and drop interest rates aggressively as deflation starts to rear its ugly head.” Michael Lombardi in Profit Confidential, December 17, 2007. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in the worst state of deflation since the Great Depression.

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