The drop in the Eurozone economic sentiment index in March compounds a very negative message for recovery prospects ahead. The debt crisis is not going away and the turmoil in Cyprus is putting a heavier deadweight on economic confidence. The evidence is piling up from an array of leading indicators that the Eurozone is sinking deeper into the recession swell. There is little chance of escape from recession this year and the odds seem to be rising that some of the better performing economies like Germany will eventually succumb to recession again. Germany is not out of the woods by any stretch of the imagination. The drop in output in the fourth quarter underlines that Germany is already half way there and there is no guarantee that the economy will sidestep it given the recent downturn in economic confidence and leading indicators.
ECB policymakers have a major dilemma. Self-enforced fiscal austerity is ripping the heart out of any recovery hopes. The ECB are doing a limited amount of counter-cyclical stimulus, but they need to do more. The German/Bundesbank model of tough policy medicine is blocking recovery. The Eurozone have a choice. Either follow the German model and face euro extinction, or else follow the easier path being mooted by France to ditch austerity in favour of pro-growth stimulus. This is down to survival tactics now. Eurozone governments need to abandon their fiscal austerity targets and the ECB needs to cut rates again and open up the monetary sluice-gates for unsterilized quantitative easing. Without this, the Eurozone will be blighted by recession for years and the euro will find itself at growing risk of spreading contagion. Short term, the euro will be heading back down to a re-test of USD1.25. Beyond that parity looms in the long term.
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