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The elephant in the room: Euro area recession

Posted By Guest Author On October 31, 2012 @ 6:47 am In MacroNotes,Think Tank | Comments Disabled

Mario Draghi may have removed the tail risk (for now) of EMU breaking apart, but words alone (nor the OMT if it is ever activated) have not been enough to stop the euro area, under the weight of tight monetary conditions and fiscal consolidation in much of the region, sliding further into recession. Growing economic weakness is evident in monetary data, as well as survey evidence (today’s EC survey being a case in point). Moreover, Eurostat estimate that real household disposable incomes fell by around 2.5% annualised in Q2. With the IMF warning of a significant contraction in the banking sector’s balance sheet in the periphery (about 17.5%) and drawing parallels with what happened to the UK in the 1920s (economic weakness, deflation and ever rising government debt-GDP), what happens next? Moreover, latest BIS data show no reduction in the French banking sector’s exposure, in particular, to the rest of the euro area as of June.

Please see attached note. Kind regards, David


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