Beyond the specifics of the Greek debacle, the re-eruption of the Eurozone sovereign debt crisis reflects economic weakness across the periphery that is undermining fiscal consolidation plans. This weakness was predicted by monetary trends in late 2010.
Eurozone-wide growth was nonetheless solid in early 2011 because of strength in Germany and other core economies. Core monetary trends, however, have deteriorated sharply since last autumn, with real narrow money M1 contracting in the six months to April – see previous post. Instead of a two-speed economy, Euroland now faces generalised weakness.
Germany has outperformed the rest of the core but is vulnerable to a slowdown in exports to rapidly-cooling emerging economies – see chart and post last week for more discussion of the E7 leading indicator. (Emerging and developing economies accounted for 24% of total and 40% of non-EMU German exports in 2010.)
For the struggling periphery, Eurozone-wide weakness could be preferable to the recent two-speed economy if a German / core slowdown derails ECB hawks and allows a much-needed depreciation of the euro.
