Austerity measures force EU into record recession

Around 200 Cypriots gather to protest against austerity measures and the troika in front of the Cypriot Parliament building on March 26, in Nicosia, Cyprus. Milos Bicanski/Getty Images

(MoneyWatch) Government austerity measures have pushed the eurozone into the longest recession in European Union history. Figures released today showed the EU's economy shrank 0.2 percent in the first quarter -- the sixth quarter in a row of contraction -- and there is little indication this will change anytime soon.

Eurostat today reported nine of 17 eurozone countries are now in recession. France, which saw its gross domestic product drop for a second consecutive quarter, was a big addition to the list of nations. France's GDP fell 0.7 percent compared with the fourth quarter due to drops in consumer spending and exports. The entire region's economy contracted 0.2 percent in the first quarter. That means on an annualized basis the eurozone is contracting at a 0.9 percent rate.

In an effort to stem the financial crisis, European nations have raised taxes and cut spending in order to reduce government debt. With private-sector spending also getting cut so far all these austerity measures have done is lowered economic activity and increased the need for unemployment benefits and other social costs.

In response to today's news economist Bill McBride wrote, "The beatings will continue until morale improves."

Howard Archer, IHS Global Insight's chief European economist, put it in terms more commonly used by analysts. "The upside for domestic demand in the eurozone remains constrained by restrictive fiscal policy in many countries, still tight credit conditions, high and rising unemployment, and limited consumer purchasing power despite general very low inflation," he wrote today in a note to investors.

Thanks to these austerity measures, the economic slowdown that started in Greece three years ago has now spread to France, Italy and Spain, which make up half of the eurozone's GDP.

The current eurozone recession has now gone on longer than the one from 2008 to 2009, although the latest downturn is not as steep. Economic output has fallen a total of 1.5 percent drop during the most recent contraction, versus a nearly 6 percent drop in the region's GDP during the global recession that immediately followed the financial crisis.

Analysts believe the recession will continue through at least the second quarter of this year.

Ben May, European economist for Capital Economics, wrote today in an investors' note, "Given that the major eurozone business surveys weakened in April, there would appear to be a reasonable chance that the economy will contract in Q2. Accordingly, we still think that the consensus forecast of a 0.4 percent fall in euro-zone GDP this year is too optimistic and expect something closer to -2 percent."

The last time the eurozone's economy expanded was in the third quarter of 2011. At that time Germany's economy was growing by 3 percent and the economic problems were hitting only Greece, Ireland and Portugal. Now the EU can't rely on Germany, which provides one-third of the region's economic output, to carry it. Its GDP expanded just 0.3 percent on an annualized basis in the first quarter of this year. While this is a significant improvement over the 2.7 percent drop seen in the fourth quarter of 2012, it is still lower than analysts had been expecting.

The European Central Bank, which has already severely cut interest rates, seems to be running out of options. As IHS' Archer notes, "An interest rate cut to 0.25 percent looks ever more possible while the ECB will also continue to look into the case for a negative deposit rate and ways of getting more credit through to smaller companies."

  • Constantine von Hoffman On Twitter»

    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.

Comments