The recession beginning to develop in the EU has shown more signs of accelerating. EuroStat reports that, “In June 2011 compared with May 2011, the euro area industrial new orders index fell by 0.7%.” At nearly the same time, “The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, dropped to 108.7 in August from 112.9 in July,” according to Bloomberg.

The numbers are not exactly comparable to PMI. The purchasing measure has begun to fall consistently in China and the U.S. The figures are, however, a sign the industrial production in Europe has begun to lag. The PMI and industrial new orders taken together are further signs that the largest economies in the world have begun to show sharp slowdowns in GDP growth, or in some cases contraction.

The EU problem is easy to underestimate because, aside from Germany and France, most of the economies in the region are small. But, total EU GDP is well above $16 trillion, which makes it $2 trillion larger than the U.S. A combination of trouble in the U.S., EU and Japan makes a global reversal in GDP expansion almost certain.

There will be no stimulus packages in Europe. Germany, which has virtual veto power over all EU decisions, is against it. That may be due to the fact that its own economy has slowed and the political reaction to more investment in the health of its neighbors would bring down the current government. It is just as likely that German officials believe any stimulus would be squandered in places like Greece and Portugal. Germany has made no secret of the fact that it believes the governments in these nations are not effective.

The individual nations in Europe will not mount their own stimulus packages. That has been obvious for some time to nearly everyone who operates in the financial markets. The budget moves in these nations is toward austerity, which, by definition, rules out money that might be spent on government-driven investment for programs that might help business expansion and job creation.

The theory behind austerity is that it lowers deficits through a combination of budget cuts and higher taxes. Politicians in nearly every nation that has adopted austerity budgets have said the same thing: government is not the source of GDP improvement; the private sector is. And, the private sector has a life of its own, driven by a desire for profits.

It turns out that the belief that austerity is decoupled from business growth is not true. Even as that becomes clear, the financial decisions by countries around Europe will not be reversed. Austerity at all costs has become the philosophy of every nation in the region.

Douglas A. McIntyre

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.