Europe is in recession.
Britain’s Office for National Statistics confirmed on Wednesday that in the first quarter of this year Britain’s economy shrank .2 percent, after having contracted .3 percent in the fourth quarter of 2011. (Officially, two quarters of shrinkage equal a recession.) On Monday, Spain officially fell into recession for the second time in three years. Portugal, Italy and Greece are already basket cases, and it seems highly likely France and Germany are also contracting.
Why should we care? Because a recession in the world’s third-largest economy (Britain), combined with the current slowdown in the world’s second-largest (China), spells trouble for the world’s largest.
Remember – it’s a global economy. Money moves across borders at the speed of an electronic impulse. Wall Street banks are enmeshed in a global capital network extending from Frankfurt to Beijing. That means that, notwithstanding their efforts to dress up balance sheets, the biggest U.S. banks are more fragile than they’ve been at any time since 2007.
Meanwhile, goods and services slosh across the globe. If there’s not enough demand for them coming from the second- and third-largest economies in the world, demand in the U.S. can’t possibly make up the difference. That could mean higher unemployment here as well as elsewhere.
What’s the problem with Europe? Don’t blame it on the so-called “debt crisis.” There was no debt crisis in Britain, for example, which is now experiencing its first double-dip recession since the 1970s.
Blame it on austerity economics – the bizarre view that economic slowdowns are the products of excessive debt, and so government should cut spending in a slowdown. Germany’s insistence on cutting public budgets has led Europe into a recession swamp. [++]