Eurozone Economy Contracts .6% in 4th Quarter; France Down .3%, Germany Down .6%, Italy Down .9%; Expect ECB Jawboning on the "Strong Euro"

As expected in this quarter (but not by economists) eurozone economies contracted at the sharpest rates in four years with Germany, France, and Italy falling short of consensus estimates.

The eurozone consensus was .4%. The 17-nation bloc shrank at .6% quarter-on-quarter while the broader 27-nation bloc shrank .5% quarter-on-quarter.

From the above Financial Times link:

Germany and France, the eurozone�s two biggest economies, both saw output shrink. German GDP shrank 0.6 per cent in the period while France contracted 0.3 per cent compared with the previous three months. Both were marginally worse than the consensus forecasts of 0.5 per cent and 0.2 per cent respectively.

Italy�s economy shrank 0.9 per cent, also more than expected, and its sixth consecutive fall. Both Dutch and Austrian GDP also contracted. The figure for the wider EU � all 27 member states � was a fall of 0.5 per cent.

The steep German decline reflected a sharp drop in net exports and investment in plants and machinery. Although business surveys have been much more upbeat, the weakness underscores how the recent appreciation of the euro could threaten an export-led recovery.

Insee, France�s national statistics agency, said manufacturing output fell 2.3 per cent in the fourth quarter after a 0.9 per cent rise in the third quarter.

Spotlight on Germany

The Financial Times noted "the contraction in Germany is widely expected to be shortlived." I believe otherwise.

Italy remains a basket case, and the French economy is seriously imploding (for details, please see France Economic Implosion Accelerates; Record Decrease in Service Employment in Italy

Precisely what is supposed to carry the German economy to strong growth?

Expect ECB Jawboning

One likely consequence of this "unexpected" news is the ECB is highly likely to start jawboning about the "unwelcome strength of the euro", hoping to talk the exchange rate lower without the ECB having to take any action. When that fails to work, the ECB will cut rates.

That will not work either. How can it? The euro is a one-size fits all currency, but what needs to happen is a rebalancing within the eurozone itself.

I spoke about this on February 7 in Illusions of Stabilization ...

Germany Will Pay a Steep Price

One way or another Germany will pay a huge price.

These are the only two eurozone recovery options

1. Germany gives (not lends) more bailout money to the rest of Europe
2. The eurozone breaks up

Until one of those things happens, signs of stabilization are nothing but an illusion. See the above link for further discussion.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com