Exporting pessimism to 2012

A dry joke is doing the rounds in financial circles as the year draws to its end. The only good that can be said about 2011 – it suggests – is that it was not as bad as 2012 is likely to be. The cynicism runs in the face of the need to be positive and to turn challenges into opportunities. It suggests that even some brave people may be giving up.

The growth of Chinese exports to the EU is slackening- Lino Spiteri

It would be wrong to do that. Hope should always spring eternal, even in the cold financial breast. Nevertheless, it is true that the outgoing year brought too many worries for comfort, and that the outlook for 2012 could be worse.

The ongoing theme has been the weakness of sovereign debt, its impact on a number of peripheral countries in the European Union, and the threat that the eurozone might not survive the strains that such weakness has created in it.

It is ironical to recall that the litany of crises, linked together in one string of beads, was triggered by the parlous situation of Greece, and that it overwhelmed relatively small countries that up until recently were hailed and lauded as Europe’s tigers.

The Greek economy is very small, in relation to that of the eurozone as a whole. It had appeared to be doing well, the Greek authorities having even hoodwinked the EU’s statistics icon, Eurostat. So well that its sovereign paper was bought by a string of cold-thinking banks in France and Germany, among other financial centres that should have known better.

When the size of its debt, the need to roll it over at ever-increasing cost and the suddenly clear weak structure of the economy pricked the bubble of the sovereign debt issued by Greece, it set off panic. Marking-to-market meant that banks that held such paper had to write it down out of accounting conventions, irrespective of whatever arrangements were worked out under the Franco-German driving engine.

It was also ironic that it took years for large investors to realise that Ireland and Portugal were sporting ever-growing bubbles in their property sectors, artificially inflating their economic growth. When the bubble burst, it paralleled the wounding gushing-out of financial air that had taken place when the US sub-prime sector collapsed. Only this time it was not just corporate and individual investors that were hit for six. National economies staggered.

The efforts led by Germany and France to come out with sustainable solutions convinced neither the rating agencies, nor the market.

The rating agencies, probably to make up for their default in giving triple-A ratings to worthless sub-prime paper, became the scourges of eurozone countries and their financial institutions. The inability of the top countries to convince with their successive “ultimate” solutions became a sad joke.

The troubles of the financial sectors will be carried forward into 2012, when they could have more devastating effect than they have had so far, including further contemplation about the ability of the euro to survive. Hence the mirthless joke I referred to above. The financial situation is worse than it appears because it is accompanied by renewed economic woes. Europe and other stricken areas were having weak recoveries following the deep economic recessions of 2008/9.

There was much apprehension that double-dip recessions would emerge. Apprehension is now reality. Much of the EU has already moved into recession, both because underlying demand for goods and services was weak, and also because the austerity programmes being implemented by various countries are aggravating the situation.

Austerity, whereby public expenditure is slashed and taxes raised, is seen as necessary to combat the structural deficits that have been ratcheted over years of shameless profligacy. To Keynesian economists, a much-maligned breed that refuses to accept it is as dead as the dodo, that was unmitigated madness. On the other hand, quantitative easing – pumping new money into the economy, a form of Keynesianism – had not worked, one main reason being that too many banks were not recycling that money into the economy.

Policymakers pleaded with the banks to do so, while arguing that the contracting effect of reduced public spending and an increased tax take would be countered by higher activity in the private sector. In other words, policymakers tried to convince that there was method in their apparent madness.

As the year is about to expire, I doubt that policymakers can even convince themselves of that. For hard evidence look outside the eurozone, where the UK’s Chancellor of the Exchequer is having to eat his words. He cut public spending by too much, too soon. The impact of the austerity measures is also being felt in China, whose largest export market is the EU. With further irony, China had been trying to slow down its remarkable growth rate, out of fear of overheating.

The contracting euro market helped it realise a harsher objective than it had set itself. The growth of Chinese exports to the EU is slackening. Next year – in 2012 – it is expected to turn negative. That, in turn, will affect the EU’s own exports to China. A possible downward spiral lies just over the horizon.

Weakening domestic (consumption) and external (exports) results will have an impact on forecast growth rates. That will translate into a lower tax tax-take for many governments, thereby reducing their ability to reduce and finance their structural deficit.

No wonder nobody laughs at the cynical joke doing the rounds.