Death Of A Market: Irish GNP/GDP Destruction, Euro Deal Punishment

 |  Includes: ERO, EU, EZU, FXE, IEV
by: One Eyed Guide

On Friday Ireland released horrifically declining 3rd quarter GDP and GNP data.

Here's the numbers:

Ireland 3rd Quarter Performance

2nd Qtr 3rd Qtr Change
GNP +1.0% -2.2% -3.2 % pt.
GDP +2.0% -1.9% -3.9 % pt.
Unemployment 14.2% 14.4% +0.2 % pt.
Click to enlarge

While exports grew 21.8% from the same period last year, it was not enough to offset the -5.4% decline in the much larger category of domestic demand. This drove unemployment up to 14.4%.

This is not good for the euro, the market or the world but there is no sign that the pain is great enough to get the eurozone to change course. From Bloomberg:

(Irish Finance Minister) Noonan said this week his budget for 2012 will ensure that the country meets the fiscal targets under its bailout. The government is targeting budget savings of 3.8 billion euros ($4.96 billion) next year even as unemployment in the third quarter rose to 14.4 percent.

The drafted Euro Deal (technically the INTERNATIONAL AGREEMENT ON A REINFORCED ECONOMIC UNION) confirmed that the Irish can expect future beatings to be worse as there is no new international risk sharing which optimal currency area theory states is a must, just new punishment when countries miss goals.

The Euro Deal tries to:

  • Add enforcement teeth/punishment to Article 126 of the European Union Treaty and
  • Tighten the deficit target from 3% to a structural deficit of 0.5% (deficit without interest payments)

Perhaps they felt that if interest payments were eliminated from the target the payments wouldn't destroy the eurozone as they skyrocketed? Is this an example of head-in-the-sand thinking?

The Euro Deal is so out of touch with reality that it appears to have been developed in Lake Wobegon where illusory superiority is endemic. The eurozone is following what economists call the Expansionary Fiscal Contraction (EFC) hypothesis, AKA the "German" approach. The research on this theory pretty conclusively shows that successful expansionary contraction only works in very limited conditions which almost never occur. In fact, the developers of the hypothesis point out that EFC only works when domestic consumption expansion is not liquidity constrained. As the current debt-deflation crisis is all about liquidity constraints, EFC theory is unequivocal that austerity is not the solution to the euro-mess.

This complete conflict of actions with well understood economic theory may be why the Fitch rating service stated a comprehensive solution to the euro situation is "beyond reach".

Instead, the Euro Deal appears certain to spread the Super Keynesian Death Spiral (SKDS) beyond Ireland, Greece and Latvia where it is currently wreaking havoc. The SKDS is when all 3 of the destructive Keynesian theoretical paradoxes are at work: The Paradox of Thrift, when everyone tries to reduce debt resulting in reduced consumption, savings and output; the Paradox of Toil, where efforts to work more reduce total employment in a liquidity trap, and the Paradox of Flexibility where the willingness to reduce wages and prices reduces the ability to consume after a debt deflation shock.

The Euro Deal is an example of the Paradox of Thrift where all countries trying to reduce their deficit (increase saving) at once means that there will be guaranteed failures - it's actually fairly easy to do the math that shows you can't get to a 0.5% primary deficit across the zone in the near future. 80% of eurozone trading is inside the eurozone so you have to assume much higher inflation and international growth than is actually happening to get most countries to 0.5% in the next 5 years. If Europe enters a recession, they loss ground.

The other two paradoxes occur in hapless countries when their governments inflict austerity at the wrong time. Ireland is the poster child for this because they do everything right but are still getting destroyed by austerity.

Greek unemployment at 17.7% in the 3rd Qtr doesn't seem to have raised any doubts with the euro technocrats. Nor do they seem worried that they're on the wrong track by the projected 19.5% unemployment for Greece in 2013. Maybe Greece is why they think Ireland is doing so well.

The Fitch "beyond reach" warning should make sure that markets quickly reach the old lows. I expect that some sort of "good" news will emerge to generate another pop but only a temporary one as Fitch seems to be right: The euro is not going to be around in its current form. The transformation will be painful.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.