A fatal recession?
THERE is a lot to keep track of in Europe these days (Charlemagne is a great resource for this, by the way), but here is a brief digest. First, George Papandreou's gambit to get the opposition behind efforts to implement necessary reforms seems to have been a success. Greece will get a new, transitional unity government to put the plan in place, though Mr Papandreou will not be leading it. This is good news for the euro zone, on the whole, as it implies that there is not yet a viable political force for departure from the euro within Greece. The medium-term political outlook for the country is highly uncertain, however.Remarkably, the Greek dynamic has become a sideshow, with Italy commanding the main stage. A flood of rumours developed over the weekend to the effect that Silvio Berlusconi was preparing to resign. Mr Berlusconi is now denying this, with predictably nasty consequences for Italian bond yields. The European Central Bank is probably in the market aiming to keep things from getting out of hand, but one has to suspect that the central bank doesn't want to do anything to deter Mr Berlusconi from leaving.And the descent into recession seems to be continuing for the euro area. Retail sales across the currency area plunged in September. Perhaps more disconcertingly, Germany's industrial production dipped 2.7% for the month. This is a very bad scenario for the single currency. The periphery is plunging into austerity. To have any hope of economic growth, which will be necessary to translate fiscal cuts into an actual improvement in budget sustainability, peripheral economies must significantly increase the contribution of net exports to growth. But these economies overwhelmingly export to each other. About 50% of Portuguese exports go to Spain, Germany, and France. Nearly 50% of Spanish exports go to France, Germany, Portugal, and Italy. Roughly a third of Italian exports go to Germany, France, and Spain. Roughly a third of French exports go to Germany, Italy, and Spain. Of the large euro-zone economies, Germany's exports are sold to the broadest and most diverse portfolio of customers. Nevertheless, over a third of its exports are sold to the euro zone, and its two largest non-euro customers are Britain and America, neither of which is in great economic shape and both of which would also like to increase their net exports.So one key problem is that troubled euro-zone countries would all like to sell more to other troubled euro-zone countries whose economies are shrinking. They'd also like to sell a lot more to Germany, and indeed, Germany should buy more from the south as part of a broad euro-zone adjustment. But Germany's economy may also start shrinking thanks to the poor outlook for most of its export customers; a big fiscal expansion could offset this but is highly unlikely to materialise. The rich world as a whole would love to start selling lots more to China, but China is (understandably but unfortunately) uncomfortable with that, at least in the very short term.While those among the world's large economies with the ability to signficantly increase domestic purchases are unwilling to do so, there will be substantial contractionary pressure on depressed rich economies. That dynamic will be unpleasant for countries like America and Britain. But it may well prove fatal for the euro zone.