Economist says Eurozone fall akin to the Great Depression

Wednesday, September 5, 2012
By Paul Martin
September 5, 2012

EUROPE – The eurozone economic downturn since the start of the crisis looks like the Great Depression of the 1930s, according to one economist. The decline in the economy of the eurozone, sparked by the beginning of the debt crisis with the shocks in Greece two and a half years ago, “seems to be more of a long-distance run than a quick sprint,” according to Carl Weinberg, chief economist at High Frequency Economics. One day ahead of a crucial European Central Bank (ECB) monetary policy meeting, the composite Purchasing Managers’ Index (PMI) for the eurozone – comprising manufacturing and services – fell to 46.3 from a flash reading of 46.6 and compared with a reading of 46.5 in July, data from Markit showed. Analysts have told Emerging Markets that September, with its string of events for the eurozone, could bring a shock to emerging markets as any bad news would trigger risk aversion. Weinberg pointed out in a market note that since the second quarter of 2010 – when Greece admitted lying about its fiscal position and markets started having doubts about its ability to pay back its debts – gross domestic product growth has declined or failed to rise in every quarter but one. GDP, which has not recovered from the post-Lehman contraction, is falling again and unemployment has risen since the eurozone debt crisis started, he added. “The Great Depression of the 1930s was not a slam-bang crash, either,” Weinberg wrote. “It was the cumulative result of a decade of cascading economic declines.” In the eurozone over the past 12 years, two “catastrophic” destructions of wealth in stock markets – the IT bubble burst between 2000 and 2003 and the financial crisis between 2007 and 2009 – have been compounded by a two-year slump in the prices of bonds of periphery countries, which in turn triggered a banking crisis, he said. Banks that are undercapitalized do not lend, so the credit crunch is getting worse, according to Weinberg. “We are not dissuaded from our outlook for a prolonged economic downturn in Euroland, an event more akin to the Great Depression of the 1930s than to any business cycle we have seen in our lifetimes,” he wrote. Our only error has been to underestimate the time frame in which this episode will play itself out,” he added, noting that when the eurozone crisis started he had expected a “rapid and steep decline of the economy into a deep depression.” –Emerging Markets

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