Don’t Believe Euro Economic Forecasts

04/13/2012 6:00 am EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

MoneyShow’s Jim Jubak explains why the forecasts for Eurozone economic growth, as evidenced by Spain’s continuing struggles, may not match up with economic reality.

You know the kid’s story The Emperor’s New Cloak? Well, we are running a version of it in Europe, and it’s called The Budget Has No Clothes.

The problem here really is that we have got all these governments out there saying, well, the target is, in the case of Spain, a deficit of 5.3% of GDP. And we have got this new package—deeply, deeply unpopular—of €27 billion worth of budget cuts and new taxes, and that will bring us down to the target.

Well, it would if the economy were behaving the way the governments wish it would. Spain basically is looking at its budget calculations and saying "Well, you know, we are actually going to only see a very mild recession in 2012, and we will maybe lose like half a point from GDP."

Anybody looking at this would say OK, no problem, Spain is on track to produce its 5.3% deficit, and to lower that to 3% or so, and in 2013, they will be exactly on target. The problem is that nobody really believes these economic numbers. You have got a lot of people just sort of hoping that they will be true.

You can only cut €27 billion now because you may need to cut €30 billion later, but trying to cut €57 billion in one fell swoop isn’t going to work at all because the political opposition has gotten so hard. So what you are really doing is managing expectations.

The Spanish government is saying "OK, we are going to be really, really strict about this. We know austerity, we can manage the budget, and to prove it we are going to give you a package of €27 billion."

Of course, the problem is that if you then need to turn around and very quickly put in place another €15 billion worth of cuts and tax increases, at some point people say "Well, you have been lying to us all along." The credibility that Spain is trying to buy from the financial markets by all these plans just starts to go out the window.

So the question is not only whether these economies will slow—I don’t think there is any doubt about that. It’s not even exactly how much they will slow. I think we can pretty much count on their slowing faster than the official numbers do. The question really is the speed.

If Spain has to come back after barely passing its €27 billion cut and tax increases, and come back in another month and ask for another €15 billion, then there is real trouble. If they can let it go for two months, three months, or maybe even four months, then I think you have some chance of the market saying "OK, you are managing this as well as you possibly could. It’s not an issue; we basically believe you have got it under control."

Speed in this case is what is going to really determine whether the markets start to believe Spain, Italy, and Portugal or not.

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