Financial Dominoes in Europe

Slip… Crunch… Crash… And repeat.

Do you hear that, Fellow Reckoner? It’s the sound of the gears slipping. Metal on metal. In the US…in Europe…and in some parts of the Asian world…the planners’ worst fears are coming true…as their economies begin to come apart.

Here in Europe we learned that the French economy – the continent’s second largest – is likely to slip into recession. At least, that’s what the central bank told the world yesterday. Here’s the BBC:

(London) France’s economy will fall back into recession this quarter, the country’s central bank has predicted.

The Bank of France estimates that the economy will contract by 0.1% in July to September. It has already predicted a fall of the same level for April to June.

France posted zero growth in the first quarter of the year.

France’s economy has been hit by the eurozone debt crisis, which has weakened demand for its exports.

The debt woes of fellow eurozone nations, such as Greece, Spain and Portugal, have also knocked French business and consumer confidence.

If France does fall back into recession, it will be for the second time in three years. It last returned to economic growth in the spring of 2009.

Well, we could have told you that France’s economy would produce nothing…or less than nothing…this quarter. Why?

Well, for a start, nobody is working! During the month of August, we have come to discover, the entire country packs away their tools and heads for the seaside resorts of the south. They fly to Greece… to Spain… and to Italy…to lounge on the beaches and drink in the warm, Mediterranean sun. They travel to the broke countries, in other words…as if trying to catch a glimpse of their own future.

One by one, the dominoes are falling…and as they do, the shocks they create unsettle the few wobbly economies still standing. Fewer and fewer number among the strong…more and more among the weak.

And remember, each time one economy fails, those few still standing are made to pitch in, spending billions – hundreds of billions – of euros they don’t have, trying to resurrect the fallen. This, in turn, creates an increasing strain on a decreasing pool of resources. Here’s David R. Kotok, writing on The Big Picture blog:

Remember that the eurozone consists of 17 separate entities. Germany is by far the largest. France is number two, Italy number three. Spain is (or perhaps was) number four, at about 12% of the total weight.

Each time a domino falls, the member state requires assistance from the remaining member states. When Greece fell into financial disarray and then failure, the other 16 states had to provide the subsidy. When Ireland fell, there were 15. Portugal made it 14. Cyprus made it 13. Now Spain leaves 12 remaining.

As the dominoes continue to fall, the costs are reapportioned among the remainder, which is a shrinking cohort.

We are beyond worry about Spain. It is now a question of survival or failure for Spanish governmental finance.

The rot has set in. And now, there is nothing for it to do but spread. Spain, still mired in a deep and protracted recession is, for our money at least, as good as a dead duck. Markets continue to doubt the Spaniards’ ability to repay their debts, driving borrowing costs ever higher.

Indeed, the situation is so dire…even the economists have begun to take notice! A poll conducted by Reuters over the weekend estimated “a median 68 percent chance of a full sovereign bailout [for Spain], involving the EU’s official rescue funds, before the end of the year. June’s poll showed 35 out of 59 economists thought that was ‘likely’ or ‘very likely.'”

Italy, too, has fallen into deeper recession. According to figures from government agency ISTAT, a 0.7 per cent fall in gross domestic product for the last quarter puts Mario Monti’s technocrats on pace for a 2.5% annual decline in GDP.

The feds loaded the truck high with debt and now, as it proceeds along the steep incline of Mount Impossible, the cogs are wearing down, unable to bear the weight.

Slip… Crunch… Crash… And repeat.

Now, if 16 euro economies, with relatively low borrowing rates, couldn’t effectively bail out tiny little Greece, what chance do Germany, France and a handful of others, have of bailing out…well, everyone?

Slim to none would be our guess and, as our friend Doug Casey likes to say… “Slim’s outta town.”


Joel Bowman
for Markets and Money

From the Archives…

As Draghi Drags the European Crisis On
03-08-2012 – Nick Hubble

China’s Economy – How the Devil is in the Detail
02-08-2012 – Greg Canavan

The Greatest Interest Rate Fix featuring… Mario Draghi and Friends
01-08-2012 – Bill Bonner

What the Credit Boom Left Behind
31-07-2012 – Greg Canavan

The Australian Economy: A Case Study in Weirdness
30-07-2012 – Greg Canavan

Joel Bowman
Joel Bowman is managing editor of Markets and Money. After completing his degree in media communications and journalism in his home country of Australia, Joel moved to Baltimore to join the Agora Financial team. His keen interest in travel and macroeconomics first took him to New York where he regularly reported from Wall Street, and he now writes from and lives all over the world.

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