After The Deluge

Last week, after 30 hours of deliberation, the political leaders of 26 of the 27 EU member countries voted for recession.  In the end they  decided to  sacrifice the short term well being of their citizens, in the expectation that in the long term the EU will recover,  emerging as a stronger and more cohesive entity

Certainly they will get half

Ø     The EU will have its Recession.

Unemployment will rise and gross domestic products within the EU will fall.

On the other hand

Ø     The EU will recover as a stronger more cohesive entity

That part is a bit more uncertain.  The Franco-German solution depends on a new EU treaty where member countries willingly surrender more of their independence and sovereignty  particularly with regard to fiscal policy such as taxation and national budgets.  Getting all 27 countries to agree as required under the current EU treaty is somewhat problematic, particularly since the UK has already vetoed the treaty sight unseen.

Furthermore there is some doubt just how long the market will wait for this new treaty which  probably will never see the light of day.  The EU will require about one year to achieve its goal, while based on experience of the recent past, the market should give them somewhat less than a week.

The more probable result, will be further decline in confidence that the  EU will deal with its ongoing problems, and a rise in the belief that the EURO is untenable.

There is also the increasing probability that the entire EU economy will become trapped in a downward spiral:  Austerity resulting in higher unemployment, which leads to lower tax receipts coupled with higher government expenditure which in turn requires greater austerity. . .

To the degree that economic well being is based on fundamentals plus confidence, the EU is in trouble the on both counts.  The fundamentals look terrible and confidence in the EU’s ability to deal with its current economic problems has all but disappeared

The real question is not how the EU will fair (the markets having already determined that the EU will fair somewhere between poor and catastrophic), but rather how its inevitable economic decline will effect the rest of the world.

The U.S. has its own problems.  The U.S. economy is either in a state of anemic recovery or a new recession (depending on how you read the data).  The hardest hit is the  middle class and the workers — the vast majority of the population.  The U.S. government plans to provide little or no assistance to those with the greatest needs, which will create the same downward spiral as in the EU. Crisis in the EU might well lead to a tipping point where recession becomes depression.

East Asia, the third economic powerhouse will also fall into severe recession.  As demand from the U.S. and the EU dries up, China and the other great export economies will be faced with serious declines and rising unemployment.  With little or no social legislation such as government sponsored medical care and unemployment benefits, the unemployed will quickly sink into poverty.

This new global recession will be very different than those of the past 50 years when the U.S. economy acted as a locomotive pulling the other countries out of their economic holes.  This time there will be no locomotive.  In fact, 2012 may well be one enormous train wreck, leaving the global economy in ruins, with little ability to rebuild

Five years ago, this scenario would have been rejected as science fiction.

Even one year ago, this scenario would have been deemed highly improbable

Today science fiction has become reality and what was once considered  improbable has become the best projection.   Many corporations and other institutions have accepted this scenario as  quite possible and are creating strategies to survive the coming disaster and operate in the post-deluge era.

It will be left to future generations to decide just who was responsible for the depression of 2012.  It will be our role to try to survive.

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