A dangerous German-Greek growth stunt

The updated European Commission economic forecasts outlined more bad news for Europe. The EC forecasts confirmed another year of weak economic conditions, rising unemployment and snail like progress on budget matters and the sovereign debt crisis.

At the same time, we saw the Greek parliament debate the austerity measures it needed to introduce in order to meet the conditions required for it to qualify for the next tranche of €31.5 billion bailout funds. If the package had failed to pass, Greece would have effectively have run out of money on 16 November when a bond maturity needs to be repaid and refinanced.

The EU's updated outlook included significant downgrades to the economic growth outlook and highlighted the fiscal and sovereign debt problems that are yet to be capped, let alone reversed. It noted, the "difficult process of rebalancing will last for some time”.

For 2013, the EC scaled back the GDP growth forecast for the eurozone as a whole from an already tepid 1.0 per cent to a near recessionary 0.1 per cent. This near zero growth will follow a 0.4 per cent fall in GDP in 2012. The main reason for the downgrade to the growth outlook is the souring German economy, which had its GDP forecast scaled back to 0.8 per cent in 2013 from a previous forecast of 1.7 per cent.

The sluggish growth outlook is expected to see the unemployment rate in the eurozone rise from the current 11.6 per cent and to a record high 12 per cent.

The EC report notes that due to the poor outlook for the economy, the task for member countries to more rapidly address their fiscal imbalances will be hampered. While government budget deficits are forecast to narrow in 2013, the fall from 3.3 per cent to 2.6 per cent of GDP is slow progress. General government debt is forecast to keep rising, hitting 89 per cent of GDP for the eurozone as a whole.

Olli Rehn, the EU Vice-President for Economic and Monetary Affairs and the euro tried to be upbeat in his assessment of the updated forecasts saying, "Our projections point to a gradual improvement in Europe's growth outlook from early next year. Major policy decisions have laid the foundations for strengthening confidence. Market stress has been reduced, but there is no room for complacency. Europe must continue to combine sound fiscal policies with structural reforms to create the conditions for sustainable growth to bring unemployment down from the current unacceptably high levels."

Whether due to the report, the aftermath of the US election or the flood of rating agency warnings about the US fiscal position, European stocks fell sharply, dropping around 1.5 per cent to 2 per cent.

Reflecting the parlous outlook for the eurozone, government bond yields also registered substantial falls in the strong economies with two-year German bonds returning to a negative yield and even the 10-year bond yield approaching new lows of just 1.37 per cent. In Spain and Italy, two of the more problematic countries in the eurozone, the 10-year government bond yield rose marginally as investors re-priced the additional risk associated with the poor economic outlook.

In Greece, the vote to implement a package of €18.5 billion of spending cuts and microeconomic reforms for the business sector passed parliament this morning. The debate occurred with yet another general strike and protests in Athens and Thessaloniki as the hardship of a sixth year of recession (probably depression) and 25 per cent unemployment continues to fuel social unrest.

Speaking in parliament as part of the debate over the austerity package, Finance Minister Yannis Stournaras said very simply that "securing the new aid was vital to avoid default and bankruptcy”.

Prime Minister Antonis Samaras was also impassioned on the importance of the austerity package passing quickly. Samaras was blunt, saying the "austerity vote will decide Greece's future in eurozone.” He went on, "the country is racing to implement its pledge and restore its credibility. Greece can't ignore the few choices it has … no one can be exempt from the tough measures necessary."

At its most basic level, Samaras said "the vote today is to ensure Greece's presence in the euro-area.”

The Troika – the ECB, the IMF and EC – are meeting on Monday to make their decision on the bailout funds for Greece. It should approve those funds now that the austerity package has passed the Greek Parliament.

In making that decision for Greece, there is the stark reality of what is almost certain to be a lost decade for the eurozone economy. That is one where there will continue to be little economic growth, persistently high unemployment and in many instances, falling living standards.

The raft of news overnight only reinforced those fears.