Spotlight on Geopolitics

The third quarter Eurostat statistics prove beyond a doubt that the recession is back. Even Germany, which in the second quarter managed 2.3 percent economic growth, is now down to 0.7 percent growth. The average growth in the third quarter for the EU as a whole is a paltry 0.4 percent.

Draconian austerity measures hit Ireland, Greece, Spain or Romania the hardest. In all these cases growth has now turned negative. Instead of stimuli packages designed to pull European economies out of the worst crisis since the 1930s, many governments were simply strong-armed into adopting austerity policies which have rolled back the feeble recovery experienced in the first half of this year.

Compared to the same period in 2009, the Greek economy has contracted by 4.5 percent, the Romanian economy by 2.5 percent, while Spain has shown no economic growth at all. True, the German economy has experienced a short period of XL growth in 2010, mainly on the back of …the Chinese stimuli package, as well as due to exports to countries like Brazil. For the majority of EU countries, however, which depend heavily on their internal markets to sustain economic growth, the austerity measures imposed on them in such an unreasonable fashion are chiefly responsible for this quarter’s negative economic data. In short, austerity policies are definitely the wrong way out of a recession.

Take Romania’s case. Before the V.A.T. increased to 24 percent and the adoption of the 25 percent cut in state employees’ wages, its GDP had managed 1 percent growth in the second quarter of 2010. In the third quarter, however, the economy contracted by 1.2 percent, as consumption dipped sharply and exports could not pick up the slack. Needless to remind readers, even Dominique Strauss-Kahn was appalled at the size of the planned salary cuts and strongly advised the Romanian government against it as early as June. As his advice was not heeded, the Romanian economy is now back on the recession path, with no growth prospects for the remainder of 2010, either.

While ideologically opposed to stimuli packages during a recession, European conservatives should, however, have had the common sense to refrain from imposing austerity measures until such time as all the EU economies recovered from the effects of the 2008 financial crisis. This sheer lack of pragmatism is currently being derided in Asia and Latin America where China and Brazil are the only two engines of growth sustaining a wobbly global economy. Not for long, tough, if the US has its way : the QE2 easy money policy adopted by the US Federal Reserve will soon affect them, as well, via an appreciation in the exchange rate of their currencies and higher prices for raw materials. Nice going, right ? (sources: Eustat, The Economist, Bloomberg, The Financial Times)

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