The News From Europe on the Economy Is Universally Depressing
The bad news has been coming thick and fast in the European debt crisis. Moody's, the rating agency, has rated both Germany and the European bailout funds negative.
So far, Germany has not panicked and investors still prefer to park their money in German credit, but this may further weaken support in Germany for managing the crisis. If the negative ratings translate into higher interest charges, the calculations that have propped up rescue schemes will no longer be valid.
Moody's did the same for the Netherlands, and only Finland, that has asked for collateral for a loan to recapitalize Spanish banks, has emerged unscathed. The logic of the downward credit revision is that eventually we reach a tipping point where the stability of countries with sound economies is compromised. The whole of Europe is not greater than the sum of its financial parts.
Spain's 10 year debt continued rising to unsustainable levels but what was even more worrisome was that short-term two-year debt was rapidly closing the gap, with long-term debt crippling Spain's ability to come up with stopgap solutions.
After Valencia announced it would need economic help, similar rumblings were heard from Catalonia, a hub of the Spanish economy and the size of Portugal, thus compounding investor jitters. According to the Spanish newspaper El Pais, four additional Spanish regions, representing a short term debts of €15 billion, are waiting in the wings. All these developments have fueled speculation that Spain will be the next candidate for a bailout.
The troika of the ECB, the International Monetary Fund and the European Union visited Greece and immediately came away with the impression that Greece will require further financial restructuring. That means more money and more time - not exactly healthy news at this juncture.
In Great Britain, the GDP contracted by 0.7%, putting pressure on Chancellor of the Exchequer George Osborne. Some are calling for his head in September's expected cabinet reshuffle; others, including the leader of the opposition David Miliband, suggest that he should move to Plan B.
Miliband has trumped his prime minister David Cameron by meeting with new French president Francois Hollande and endorsing his pro-growth approach.
In France, unemployment rose for the 14th consecutive month, but essentially the new Socialist government has been living a charmed life. It still pays low interest on French debt, although the economic fundamentals in France are hardly better than in some of the troubled countries in the euro zone.
Given the pro-growth orientation of the Socialist government, the deficit in France is about to increase.