The one hope that financially weak eurozone nations have to offset the effects of austerity on their economies is to show GDP growth. That not likely because austerity robs economies of stimulus money. New GDP figures from Italy are a sign that austerity may be coupled with failing economies, not improving ones. That means austerity has a smaller and smaller chance to bring budget deficits down.
Italy reported that its GDP dropped 0.2% from the second quarter to the third. Bloomberg points out that this begins the fifth recession in the southern European nation since 2001. An improvement in the GDP number would have given hope that a combination of economic growth and a drop in government expenditures would narrow budget gaps and, eventually, Italy’s indebtedness. The final effect of that process should be that Italy’s borrowing costs fall.
The yield that weak eurozone nations have had to pay on newly issued sovereign debt has fallen in the past two weeks, after reaching eurozone era records. That decline will not continue.
Capital markets investors will look at Italy’s new numbers as a confirmation of one of the two things they fear. The first is that politicians and voters will block austerity plans. The second is that a substantial economic slump will hit the eurozone region. What many thought politicians could not do — put austerity in place — has happened. The second part of the equation may be worse than forecast.
Douglas A. McIntyre
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