The euro area’s abysmal performance, sinking into recession during the first quarter, occurs against a backdrop of seemingly favorable conditions. Plummeting energy and commodity prices should have provided a much-needed boost to the euro area’s GDP, bolstering its external sector through reduced imports.
However, amidst this surge of irrational exuberance, the Citi global economic surprise index has plunged by twelve points, while its euro area component has taken a catastrophic nosedive of 123 points. As if trapped in a downward spiral, even the US economic surprise index has descended by thirteen points.
The massive EU Next Generation stimulus plan was expected to offer a positive impact. But, none of these effects have materialized, further underscoring the fact that gargantuan government stimulus plans rarely translate into tangible growth and productivity. Instead, they often favor politically connected sectors while doing little to generate jobs or foster genuine economic expansion.
This outcome hardly comes as a surprise, considering the past failures of initiatives like the Juncker Plan and the Growth and Jobs Plan of 2009, which failed to deliver any meaningful multiplier effect. The euro area finds itself trapped in a cycle of fruitless government stimulus plans, marked by abysmal productivity growth, double the unemployment rate of the US, and a stagnant economy that simply refuses to take flight.
It is crucial to comprehend that this downward trend in economic surprises transpires amidst two colossal stimulus plans in the euro area and the US. Moreover, it transpires despite the advantages of reduced imports due to falling commodity prices and increased exports facilitated by China’s robust reopening—albeit falling short of consensus estimates, China remains a driving force behind global growth, alongside India.
Eurozone Recession: Monstrous Stimulus Plans Yield Inflation and Feeble Growth
Many attribute this decline in macroeconomic figures relative to estimates to rate hikes. However, few place blame on the absurdly negative real interest rates and monstrous stimulus packages responsible for the meager returns on economic investment. Consider this: In 2020, the world “invested” nearly 20% of its GDP in public and monetary stimuli, all in pursuit of a robust recovery that never came to fruition. Instead, all that materialized was rampant inflation and feeble growth.
The spectacular failure of these gargantuan stimulus plans seldom receives scrutiny in academic papers. It seems that certain academics have chosen to avoid any analysis that mildly questions governments and their bloated spending. The truth is, stimulus plans falter repeatedly, and when confronted with feeble recoveries, the blame is shifted towards the normalization of rates rather than the nonexistent multiplier effect of these mammoth government schemes. The result? A trail of unsustainable debt and now, inflation.
Even social programs have proved ineffectual. Recent Eurostat figures for 2022 indicate that a staggering 95.3 million individuals in the EU face the risk of poverty or social exclusion, equivalent to 21.6% of the population. In 2018, these figures stood at 109.2 million people, or 21.7% of the population. Such a minuscule improvement is hardly worthy of celebration, especially considering the enormous social spending, exceeding two trillion euros in stimulus, and the population growth during this period. The tired argument that “it could have been worse” holds no weight. Numerous examples of better uses of public money all over the world.
Contrary to popular belief, it is not rate hikes that have inflicted damage upon the feeble eurozone economy; it is the colossal spending endeavors undertaken by governments. But, there is no trace of tangible progress in terms of productivity or job creation, save for a feeble resurgence in the tourism sector. The concept of a fiscal multiplier is but a distant illusion. The growth trajectory has regressed, merely retracing its steps back to the dreary state of December 2019. The eurozone teeters on the precipice of recession, burdened by an immensely swollen debt load.
Eurozone Recession: Monetary Policy Stagnates, Investors’ Mirage of Rebound Shattered
A slight decline of a mere 9.5% in the balance sheet of the G4 central banks follows a staggering 78% surge witnessed in 2020–2021. Rate hikes have merely served as a meager correction to the economic anomaly of negative interest rates. The much-anticipated normalization of monetary policy proceeds at a snail’s pace, while central banks continue to embrace excessive accommodation. Despite this grim reality, some investors naively cling to hope, anticipating a mirage-like rebound courtesy of government programs that have repeatedly proven futile in bringing any tangible improvement. Unfortunately, such hopes shall remain unfulfilled.