According to the Handelsblatt, last Monday (February 15th) ECB president Mario Draghi declared during a hearing at the European Parliament’s Economic and Monetary Affairs Committee that ‘The first weeks of this year have shown that the euro area and the Union at large face significant challenges. A strong effort by all policy makers will be needed in the months ahead to overcome them’ (see here for the complete text).

Draghi explained that investments remain weak as increased uncertainty about the volatility of the global economy and wider geopolitical risks negatively affect investment decisions. The task ahead is now to integrate all relevant policy domains in order to make the euro area more resilient to exogenous shocks. The ECB is ready to do its part. To quote Draghi once more:

‘In parallel, other policies should help to put the euro area economy on firmer grounds. It is becoming clearer and clearer that fiscal policies should support the economic recovery through public investment and lower taxation. In addition, the ongoing cyclical recovery should be supported by effective structural policies. In particular, actions to improve the business environment, including the provision of an adequate public infrastructure, are vital to increase productive investment, boost job creations and raise productivity.’

All of this is very diplomatically put, but the message is nonetheless clear. Keep in mind that the president of the ECB is a representative of the economic mainstream. Draghi is saying nothing less than that all previous attempts by the ECB to turn the European economy around have failed. The fact that he advocates a mix of fiscal policies and public investment (which is even considered the main component of the ‘structural measures’ that he proposes), shows how deep the worries of the president of the European Central Bank about the condition of the European economy have become.

And he is right. The economic situation in Europe is in danger of spiraling out of control. We are running the risk of having a recession after the long recession that we are still combating. This also holds true for Germany. As Figure 1 shows, the volume of orders in the German industry decreased. There are no new impulses, neither domestically or from abroad.

Figure 1

This is in accordance with the Ifo-index, which fell in December and in January. The horizontal development (showing no recovery) that exists already since 2011 continues unabated. Given the current turmoil in the global economy, a fall in the coming months is not out of the question.

Figure 2

The evolution of new orders in the German manufacturing sector shows that several future scenarios are possible (see figure 3). The slump in orders from non-EMU countries somewhat reversed, but orders from the within the euro area decreased. If the crisis in the major emerging markets deepens and the situation in Europe remains fragile, it is well possible that the volume of orders from outside the EU will also start to fall. If this happens, Germany will enter a recession.

Figure 3

Industrial production within the EU fell significantly in December: the difference is a full percentage point (seasonally adjusted) compared to the previous month. France and Germany were affected equally, while Italy, which of all the big countries is doing by far the worst, again suffered a setback. It is no wonder that the Italian government is becoming increasingly nervous. The economic upswing that they have repeatedly promised (see here) is still nowhere to be seen.

Figure 4

Even southern Europe, which suffered the most from the crisis, shows no signs of improvement. The German media recently reported enormous growth figures in car sales in southern Europe (see here). This is a strange (and a new) phenomenon because these sales do not reflect themselves in higher production figures, so the cars being sold must all have been stockpiled. The situation in Portugal is again getting worse, while Spain stagnates. Only Greece shows a slight improvement (which has nothing to do with booming car sales).

Figure 5

The same is true for most of the northern countries: there is no recovery (see figures 6 and 7).

Figure 6

Neither in Austria, the Netherlands or Belgium on the one side or in Norway, Sweden, Denmark and Finland on the other can any real signs of recovery be detected.

Figure 7

Even in the eastern European regions such as the Baltic states nothing more than stagnation can be observed (see figure 8). As we often said before, this is extremely worrisome. Where is all of this supposed to lead to when these regions do not turn around in the next couple of years?

Figure 8

The same applies in principle for the central European countries, as is shown in figure 9. According to these figures, Romania is not stagnating, but I have some doubts about the accuracy of these data. I see no stable developments in Romania and certainly no real stable upward trend.

Figure 9

Even in the countries that previously witnessed real signs of improvement a slowdown set in last December. The only exception is Slovakia, which shows a stable upward trend. The evolution in the Czech Republic, Hungary and Slovenia is downward (see figure 10).

Figure 10

In the small countries, industrial output did also not increase (see figure 11). Even Ireland, the only country in Western Europe that experienced an upswing after 2011, stagnates now at a high level.

Figure 11

Read in the second part how other indicators develop and why we are so skeptical of the official GDP calculations.