While EU policymakers make arrangements for their 14th summit in the last two years, Europe’s flagging economy continues to slip deeper into recession. On Monday, the Eurozone’s Manufacturing Purchasing Managers’ Index (PMI) reported that production and new orders had declined for a 5th straight month. According to a survey of economists by Reuters, “The euro zone economy is already stuck in a recession that will last until the second quarter of 2012….They forecast the economy will probably see no growth this year.” (Reuters)
The slowdown in manufacturing is just the latest sign that political gridlock is taking its toll on the broader economy. While politicians wrangle over the details of a proposed “fiscal union”, unemployment continues to rise and stagnation sets in across the continent. Insane adherence to budget-shrinking austerity measures have made a bad situation far worse. Instead of expansionist “counter-cyclical” policies, EU leaders have forced debt-stricken countries in the south to undergo internal devaluation and endless rounds of debt deflation to meet their budget targets. The belt-tightening has shrunk government revenues, increased the deficits and ignited widespread social unrest.
The deteriorating economic situation is further complicated by funding stresses in the banking system that foreshadow a severe credit crunch in the near future. EU banks are no longer able to fund themselves in the wholesale market and must depend almost entirely on the European Central Bank (ECB). New ECB president Mario Draghi has tried to prop up the faltering system by offering “limitless” 3-year loans at 1 percent on all types of collateral. In its first tender, the ECB issued 489 billion euros (nearly $600 billion) to EZ banks, but the banks immediately deposited 452 billion euros of that sum back at the ECB. The condition of the banks is considerably worse than anyone had imagined. They’re hoarding money to meet new capital requirements and in order to roll over their debts now that they’ve been locked out of the markets. Here’s the story from Reuters:
“Euro zone banks will continue to park their cash with the ECB in 2012 rather than lend it as recent cash injections offer little hope of thawing frozen interbank markets….
