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Thursday, March 28, 2024

European Commission Warns Of Dire Future Unless Germany Issues Much More Debt

Courtesy of ZeroHedge View original post here.

One day after the IMF, whose former boss is now head of the ECB, warned Europe to “prepare for the worst” and put in place emergency plans for an economic slump strongly urging Europe to implement a major fiscal response (translated: Germany should issue much more debt), the European Commission published its own economic forecasts which as Bloomberg’s Richard Breslow said “make for a dour reading.”

Specifically, the European Commission cut its euro-area growth and inflation outlook even as Germany appears to be careening into a recession with its manufacturing engine contracting sharply for over a years..

… amid global trade tensions and policy uncertainty, warning that Europe’s economic resilience won’t last forever.

“Adding to domestic economic shocks and policy uncertainty, the slowdown in global demand and weak trade has hit the European economy hard,” EU chief economist Marco Buti wrote in the report.

The Commission sees economic momentum remaining subdued through 2021, if not entering an outright recession, and forecasting GDP growth of 1.2% for that year. Meanwhile, at 1.3%, inflation is projected to remain far below the European Central Bank goal of just below 2% over the medium term.

The projections, in line with those of Wall Street analysts, reflect the admission of more pronounced weakness in the region, which has been especially impacted by the global trade war as tariffs disputes hit manufacturers and dent broader confidence. The slowdown resulted in the ECB last month cutting rates to even more negative levels and re-launching QE. The Commission also warned that risks, which include the possibility of a disorderly Brexit, remain “decidedly to the downside.”

While the strength of the labor market and the resilience of the services sector have so far prevented a more broad-based deterioration of momentum, Buti warned that “this resilience cannot endure indefinitely.”

“Economic activity now looks set to slow down in a number of member states, which at first appeared immune,” he added.

Hardest hit by the global slowdown has been Europe’s manufacturing sector, and as a result manufacturers across the region have lowered their outlooks in recent weeks. As Bloomberg notes, Rheinmetall cut its full-year forecast citing a downturn in global automotive production, Siemens said weakness in the car and factory-equipment industries will lead to a decline in some business volumes next year, and Volkswagen’s finance chief warned of two tough years ahead for industry.

To be sure there have been some “green shoots” in recent economic data, including French momentum which proved more resilient than expected in the third quarter, and robust growth in the Spanish economy. However, more ominously, Germany probably slipped into a technical recession at the same time, with the Commission predicting only “muted growth” through 2021. As for Italy, the expects “no signs of a meaningful recovery.”

So what is the European Commission’s advice? It’s the same as that of the IMF, and now former ECB head, Mario Draghi: spend more! Because apparently a crisis that was the result of too much debt can only be fixed with even more debt.

“Using available fiscal space actively would allow member states not only to provide a fiscal stimulus amid the sharp slowdown in manufacturing that threatens to spill over to the labor market, but also to refresh and modernize the public capital stock, thereby boosting potential growth,” the Commission’s report said.

That echoes the latest demands by the ECB, which deployed fresh monetary stimulus in September in a package aimed at bolstering the economy, although outgoing chief Mario Draghi warned that euro-area governments should do more to support the central bank’s efforts with fiscal spending, a message his successor Christine Lagarde has also pushed.

So far, the message has fallen on deaf ears. German Finance Minister Olaf Scholz said on Thursday the country is in a “stable economic situation” adding that “we will have more growth in the next years. If the trade tensions worldwide will be reduced, this will have a real impact on better growth.”

In other words, only a major European crisis will get Germany to do what policymakers demand it it should do. We almost know what happens next…

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