France’s National Statistics Office reported that France entered a recession this quarter with their GDP turning negative with – 0.2% growth. Forecast for next quarter is – 0.1 %. GDP growth is expected to turn positive again and grow (+) 0.1 % during the last 3 quarters of 2012.
Read more about France’s recession by reading this Bloomberg article here. While more countries in Europe are moving closer to a recession (France is not the only one), the European Central Bank (ECB) is more likely to engage in monetary easing.
Last week countries in the Euro zone moved closer to fiscal union through new agreements passed at the European Summit in Brussels. The 17 euro member nations established new deficit targets for their own governments through widely adopted austerity measures which includes a structural budget deficit target of 0.5% for each country’s GDP.
Bloomberg reported this morning that according to European Commission forecasts, 12 of the 17 member Euro zone countries would outright flunk the budget deficit target of 0.5 % by 2013.
Failing to achieve the target would result in penalties by violators.
Germany’s Chancellor Merkel believes that excessive government spending caused the European debt crisis. But in reality, the biggest cause of the EU economic crisis was excessive lending by European banks and not excessive government spending by member nations in the Euro zone.
European governments began accumulating government debt as a response to the economic crisis that was caused primarily by the European banking industry.
Merkel’s solutions to solve the Euro zone crisis primarily centers around government belt tightening rather than addressing some of the systemic causes of the entire financial crisis: weak financial regulations.
Merkel believes that imposing strict government debt targets in the future is the surest way to prevent another financial crisis. However, imposing excessive budget reduction targets that only a handful of Euro zone countries can realistically attain has the potential to weaken the overall economy in the European Union and further accelerate a European recession.
Impact of Aggressive Austerity Measures on the European Economy
Decreased levels of government spending as a result of austerity measures often leads to job cuts and decreased levels of spending in the economy.
Imposing aggressive austerity measures in a weakened economy can create a challenging economic environment whereby economies further contract, government debt grows, revenues decline, and taxation because more difficult to impose on the general population.
If an economy contracts, lower levels of outside investment money will be flowing into the country to build the infrastructure and bet on future growth.
Businesses scale back and horde their capital due to recessionary fears, creating fewer jobs, and driving aggregate demand lower.
If Europe enters into a deeper recession while European leaders and the ECB sit on their hands and only insist on austerity measures, the threat of deflation and social unrest become more palpable throughout Europe.