Economics and politics - comment and analysis
2. February 2016 I Heiner Flassbeck I Business Cycle Analysis, Countries and Regions, Economic Policy, Europe

Cyclical analysis of European economies shows no recovery in autumn. Part 2

We saw in the first part that Europe is unable to escape from its stagnation trap.  Except for some very small countries, there is no economic recovery anywhere, as measured by industrial output, which is the only really useful indicator.

The construction sector, the second most important component of economic development, showed no upward trend in November either (not all data for November for all countries are available) (see Figure 1). While the construction sector improved somewhat in Germany, in France and in the EMU as a whole, the evolution cannot be called anything else than sheer stagnation.

Figure 1.

Picture 1 CA2

In Southern Europe the situation did not improve (see Figure 2). Spain and Italy are stagnating, at best, and Portugal recorded a slight downward movement to what is now an extremely low level.

Figure 2.


Retail sales, the third most reliable indicator of economic development, showed a very serious slow down (see Figure 3). France entered a real slump and in Italy the slightly upward movement is weakening. Germany experienced again a very slight recovery, but this is insufficient to prevent worsening retail sales in the EMU as a whole.

Figure 3.


Remarkably, this evolution is taking place although the price for crude oil is at its lowest levels in decades. Consumers should therefore be able to afford more domestic goods. Retail sales in southern Europe look dreadful (see Figure 4). Once again, there is no improvement, with the relative exception of Spain, where a slow-motion-like improvement continues.

Figure 4.


Given the general economic outlook, it is impossible for unemployment to decline, although the official figures show small improvements (see Figure 5). However, as we often explained, with stagnating production this just means that more people are employed in part-time jobs and that some of the unemployed have given up their elusive search for work. Either their social welfare payments expired or they dropped out of the system. Officially, they are not considered unemployed.

Figure 5.


Price levels in the euro area remain deflationary. Prices also signal a clear shortfall compared to the target (see Figures 6 and 7). Producer prices are with minus 3% clearly deflationary. The slump in commodity prices will reinforce this evolution even further. When this takes place, consumer prices are likely to fall back below the zero line.

Figure 6.


The development in the individual countries confirms the overall evolution. The only county without deflation is Greece, which probably means that Greek wage cuts finally ended. The uniformity of the development of all other countries, however, shows that there is a general cause of deflation and there can be no doubt about it that it is the pressure on wages.

Figure 7.


Economic policy implications

The worsening economic outlook in Europe, which was already very weak to start with, should make all alarm bells go off for all economic policy makers. In reality, nothing happens. It is business as usual, no one revolts, the media remain mainly silent and the politicians who are responsible for the situation fail to act and pretend that nothing is happening.

Sweden offers a good example of the sheer irrationality that is now common practice. The Swedish National Bank decided that it will intervene into the currency market if the Swedish Krona appreciates too much. A ‘license to depreciate’ the currency (it is called ‘financial and economic policy’ – see here) is the correct term. The Swedish central bank justifies the move by making the argument that they must be capable to avoid deflation. The Riksbank has an inflation target of 2%, but currently, the rate is far lower. As everywhere in Europe it is zero. If the Krona appreciates, imports are becoming cheaper, which increases the risk of deflation.

That is just great. The Swiss National Bank makes the same argument, as it wants to prevent any further appreciation of the Franc. And so the madness goes on. The ECB will try to stimulate the economy by depreciating the euro. The bank considers this the right instrument to defeat deflation. Everyone says, of course, that they have no exchange rate target, because exchange rate targets are frowned upon. Inflation targets are good enough and if they fit a depreciation, we must just all depreciate. All of this is very simple, but it is also clearly impossible. If everybody depreciates, who should appreciate? Until now, we have all depreciated against the US dollar. The US accepted this without too many complaints. It will be interesting to see how this continues, as in the US export is collapsing and some US commentators will soon understand that this might have to do with the depreciations of their European and Asian ‘friends.’

These absurd and counterproductive developments show very clearly that neoclassical and neoliberal concepts are of no use. They do not work under any circumstances. The implementation of their policies cannot lead us back to growth, the contrary is true. Apart from beggar-thy-neighbour mercantilism, the neoliberals have absolutely no idea about what needs to be done to stimulate the economy. The neoliberals succeeded in implementing their policies everywhere. Now that the global economy is in a severe slump, they are clueless on how to proceed.