Sound bites: Eurozone economic confidence drops to 88.6 from 90.1 in April

Quite clearly, economic optimism has hit a brick wall in the Eurozone. The Eurozone debt crisis, the slowdown in the global economy and generally weak economic perceptions are joining forces to keep the euro area battened down by recession. The continuing fall in Eurozone economic confidence is paving the way for a deeper dip into negative growth territory given past trends. Weak economic confidence compounds the weak message evident in recent purchasing manager surveys and from the bleak stories coming out from individual Eurozone economies. From the troubled Eurozone countries to the core countries, the message is the same - only with a difference of degree. The recovery is going nowhere fast and the odds are that the Eurozone will extend its recession through 2013, possibly into 2014, without quick prescriptive action from Eurozone policymakers.

The components of demand underline the risks ahead. Unemployment is on the rise, real incomes are being squeezed hard and consumer sentiment is on the ropes. Weak perceptions about the economic picture, means output and investment intentions remain hard pressed in industry. The government sector remains a net drain on the economy, especially while the focus remains fixated on austerity. The export sector can only remain hampered by the global slowdown without a much weaker euro.

The policy environment must change fast. Monetary and fiscal policy need to work in concert, not in conflict. The ECB needs to cuts rates again this week. Cutting rates is only a small part of the story. The ECB needs to open up the monetary floodgates in size to refloat recovery expectations. It also needs to insure that consumer and companies can get much better access to better  credit. On the fiscal side, tough austerity needs to come to an end, with renewed focus on growth promotion policies instead. The tide is already starting to reject austerity in some countries, but the shift  needs to be much more universal and substantial. The euro needs to go lower to boost export hopes, so an official  whispering campaign for a more competitive currency could reap massive dividends for recovery prospects ahead.