Daily commentary: Europe is in a double dip recession

The news from Spain’s statistical agency INE is that the Spanish economy shrank 0.3% in the first quarter of 2011. Spain thus joins ten other Western European economies in recession, all of them in the euro zone except the UK. The list is the UK, Greece, Italy, Portugal, Ireland, Belgium, Denmark, the Netherlands, Czech Republic, and Slovenia. What this tells you is that austerity, official policy in the UK and the euro zone to fight government deficits, is contractionary by nature.

None of this should come as a surprise. Given the policy response, I am surprised it took as long as it did to move to recession. I predicted as much fully two years ago. And I told you already in October that Europe was likely already in recession. My worry then as it is now is the banking sector and debt deflation. The European banking system is weak and the American one is only marginally better. The Europeans are setting the preconditions for a bank run and debt deflation like the one we witnessed after the Creditanstalt failure in 1931.

As I have noted in the past, there is nothing inherently wrong in forcing down government spending if the goal is to reduce deficits. However, in doing so it must be recognised that this reduces potential growth and can lead to recession or worse. The goal is to avoid worse case outcomes. We are not doing that.

That’s it. Here are the links. (There are a lot of them.)

Daily commentary: Europe is in a double dip recession

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