rabble blogs are the personal pages of some of Canada's most insightful progressive activists and commentators. All opinions belong to the writer; however, writers are expected to adhere to our guidelines. We welcome new bloggers -- contact us for details.

European financial crisis: Apocalypse soon?

Please chip in to support more articles like this. Support rabble.ca for as little as $5 per month!

The OECD's new assessment of the macro-economic situation makes for pretty grim reading. And their forecast of very sluggish global growth (just 1.6 per cent for the OECD area in 2012) is based on an increasingly incredible view that the Eurozone will "muddle through" and experience only a mild recession.

They do not seem to have convinced even themselves that this is really the most likely outcome.

They make some fairly heroic assumptions to get to their weak growth scenario. Noting that the legislatively mandated cuts to government spending in the U.S. amounting to 2 per cent of GDP in 2012 would tip that country into recession, they assume that fiscal tightening will be a much more limited 0.5 per cent of GDP. They assume further interest rate cuts by the ECB, and continued very loose monetary policy in the U.S., the U.K., Japan and elsewhere.

While nothing really, really bad is forecast to happen in the Eurozone in the central projection, in Box 1.5 (p.49) they set out a scenario in which the spread of "contagion" to Italy and beyond leads to a financial crisis and a collapse of real business investment and consumer confidence roughly similar to that experienced after the fall of Lehman Brothers in the Fall of 2008, with the impacts on the U.S. being at least as great as in the Eurozone itself. The OECD growth rate would fall by 2 per cent of GDP in 2012 compared to the 1.6 per cent baseline. And that relapse into recession scenario itself assumes that no country leaves the Eurozone.

There is an extended discussion -- from p.39 -- on the crisis mechanisms that would come into play in a deepening of the Euro crisis. Sovereign debt defaults would likely lead to an international banking crisis as well as a collapse of business and consumer confidence. It is noted that very little is known about non-bank holders of European sovereign debt and, crucially, credit default swaps on that debt. It is extraordinary that, three years after the collapse of much of the U.S. shadow banking system, very little is known about where the Eurozone default risks are concentrated. (e.g. at p.47: "Little is known about the exposure of U.S. and Japanese non-bank financial institutions to the euro area countries."

The OECD are pretty weak on solutions. They call for easing of fiscal restraint in the U.S. (from a currently anticipated level of 2 per cent of GDP), but say that in the Euro area "planned consolidation must be implemented to regain confidence." (p.36.) It is interesting to note (See Table 1.4) that if the Euro area is taken as a whole, it is in much better fiscal shape than the U.S. But the markets must, apparently, be appeased regardless of the facts on the ground.

In a worse case scenario where countries left the euro, Armageddon:

"If everything came to a head, with governments and banking systems under extreme pressure in some or all of the vulnerable countries, the political fall-out would be dramatic and pressures for euro area exit could be intense. The establishment and likely large exchange rates changes of the new national currencies could imply large losses for debt and asset holders, including banks that could become insolvent. Such turbulence in Europe, with the massive wealth destruction, bankruptcies and a collapse in confidence in European integration and co-operation, would most likely result in a deep depression in both the existing and remaining euro area countries as well as in the world economy." (p.53.)

An upside scenario, by contrast, would require euro area guarantees on all sovereign debt, backed by ample resources, and most likely involving the European Central Bank. Exactly what seems to still be a political non-starter for Germany.

This article was first posted on The Progressive Economics Forum.

Thank you for reading this story…

More people are reading rabble.ca than ever and unlike many news organizations, we have never put up a paywall – at rabble we’ve always believed in making our reporting and analysis free to all, while striving to make it sustainable as well. Media isn’t free to produce. rabble’s total budget is likely less than what big corporate media spend on photocopying (we kid you not!) and we do not have any major foundation, sponsor or angel investor. Our main supporters are people and organizations -- like you. This is why we need your help. You are what keep us sustainable.

rabble.ca has staked its existence on you. We live or die on community support -- your support! We get hundreds of thousands of visitors and we believe in them. We believe in you. We believe people will put in what they can for the greater good. We call that sustainable.

So what is the easy answer for us? Depend on a community of visitors who care passionately about media that amplifies the voices of people struggling for change and justice. It really is that simple. When the people who visit rabble care enough to contribute a bit then it works for everyone.

And so we’re asking you if you could make a donation, right now, to help us carry forward on our mission. Make a donation today.


We welcome your comments! rabble.ca embraces a pro-human rights, pro-feminist, anti-racist, queer-positive, anti-imperialist and pro-labour stance, and encourages discussions which develop progressive thought. Our full comment policy can be found here. Learn more about Disqus on rabble.ca and your privacy here. Please keep in mind:


  • Tell the truth and avoid rumours.
  • Add context and background.
  • Report typos and logical fallacies.
  • Be respectful.
  • Respect copyright - link to articles.
  • Stay focused. Bring in-depth commentary to our discussion forum, babble.


  • Use oppressive/offensive language.
  • Libel or defame.
  • Bully or troll.
  • Post spam.
  • Engage trolls. Flag suspect activity instead.