A growing consensus  among economists is that the second wave of Covid-19 has induced a repeat of the lockdowns  of economic activity that sent Q2 metrics into a tailspin. Though the lockdowns currently underway may not exactly match the draconian character of the earlier  shutdowns, they are becoming increasingly severe as the coronavirus infection rate in many European countries threatens to overwhelm their medical systems.

Though several  viable vaccines are on the horizon, it will likely not be until mid to late 2021 that they succeed in terminating the current pandemic. The current reality in terms of economic activity and Covid-19 makes it increasingly clear that the Eurozone, for the most part, will return to recession after the recovery in Q3. This means at least 2 consecutive quarters of negative growth from the Eurozone, in Q4 2020 and Q1 2021.

Inevitably, a double dip recession throughout the Eurozone will  have a significant negative impact on the region’s primary trading and economic partners, notably China and the United States. In addition, the projected double dip recession will further strain sovereign balance sheets, already burdened with unprecedented levels of debt for addressing the recession that occurred in Q2. Adding trillions of euros in public debt, and trillions more, to the balance sheet of the European Central  Bank, points to a growing sovereign debt crisis likely to impact just as the pandemic has receded.

The latest stage in the Greek debt crisis has the been the referendum called by Prime Minister Alexis Tsipras, whose ruling Syriza party was elected on a platform of opposition to the austerity measures imposed by the Eurozone and the International  Monetary Fund, in exchange for loans to service what almost everyone recognized are sovereign debts that Athens can never repay. With the collapse of talks between the Greek government and its creditors, Tsipras called the referendum, seeking a “no” vote  on the latest bailout terms offered by the Eurozone and IMF.  Not surprisingly, many business commentators and economists have savaged the negotiating tactic being employed by Tsipras, essentially claiming that such an approach will lead to the inevitable ejection of Greece from the Eurozone, and an even worse contraction of the already depressed Greek economy.

On the basis of cold logic, those pundits may be correct. However, the affairs of human societies are rarely played out in a purely logical manner. Those observers, and the leadership of the Eurozone and IMF, have ignored the lessons from Greek history of the last century.

In  asking Greek voters to render a vote for “Οχι” (pronounced “Ohi,” which is “no” in Greek), Tsipras was echoing one of the most important dates on the Greek national calendar, “Ohi Day,” held every October 28. “Ohi Day” commemorates an event that occurred on October 28, 1940 which has influenced the Greek national character ever since. In was on that day that the Italian ambassador to Greece handed an ultimatum to the Greek Prime Minister, Ioannis Metaxas. Mussolini, who was jealous of the military successes achieved by his Axis partner, Hitler, decided he would attempt the game of conquest as well. Despite the fact that Metaxas was a dictator, sympathetic  to both Nazi Germany  and Fascist Italy, Mussolini decided on attacking Greece for no other reason than it appearing to be a defenseless country, ripe for easy conquest. At 3.00 AM  Metaxas was informed by Rome’s ambassador that an Italian army would march  into Greece from Albania in less than 3 hours, and he must capitulate or expect war. The answer from Metaxas was “Ohi.”

That one word rallied Greek resistance to the invasion mounted by Fascist Italy. Metaxas, who was an ill man who would die within months, underwent a profound metamorphosis. He abandoned his previous empathy for fascism, and became a stalwart fighter for democracy. On the day of the Italian invasion, Metaxas issued a proclamation to the Greek people which began with these words, “The hour has come to fight for the liberty of Greece , her integrity and honor.” In a stirring radio broadcast made a month later, Metaxas told his nation, “All must know that the struggle must be hard and long, and that our road will not be strewn with flowers, but we shall overcome all difficulties, face all perils…We are fighting for values the significance of which goes beyond our own frontiers and those of the Balkan countries and extends to all humanity. Let us thank God that His will has again destined Greece  to fight for such a lofty cause.”

To the surprise of the entire world, the Greek army utterly routed the Italian invaders, and even liberated a large party of Italian-occupied Albania. It was the first time in World War II that an Axis army had been defeated in a land campaign. At a dark time in human history, the courage of the Greek nation was a rare beacon of light.

Eventually, Nazi Germany intervened in the fighting, and its massive war machine overcame Greek resistance. However, even under Nazi occupation, the Greek people continued to resist by mounting guerrilla warfare. The war brought much suffering to Greece, and an argument could have been made that accepting the Italian ultimatum might have spared the nation much material suffering. However, the cost would have been severe to the Greek people’s sense of national dignity. In 1940, they followed in the direction set by Metaxas, and established an example of national honor that inspired the world.

On July 5, 2015 the Greek people have again said “no.” As in 1940, despite the hard road mandated by their decision, the Greek people have placed national honor and dignity on a higher plane than the only other alternative on offer: an ultimatum based on collective indignity and national impoverishment .

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Negotiations between the Greek government  of Prime Minister Alexis Tsipras and his Syriza ruling party on one side, and the IMF and Eurozone creditors of the massive public debt  afflicting Greece on the other side, have collapsed. A collision course is now being pursued between the two opposite sides, a game of fiscal chicken with no discernible good outcome for either side.

With the collapse of talks between Athens and her creditors and the announcement by Tsipras of a pending referendum by the Greek electorate on a bailout deal being offered by the Eurozone and IMF (which Tsipras recommends be rejected), the European Central Bank appears on the verge of ending its liquidity lifeline to Greek banks. If that happens, Greece may close its banks as early as Monday, and impose capital controls. The end result: a Greek exit from the Euro appears more likely, along with the inevitable disruptive ripples that will afflict not only the Eurozone, but the global economy as a whole.

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It is high noon in the Eurozone, as talks between Greece and her creditors have collapsed. Greek Prime Minister Alexis Tsipras was elected on an platform of anti-austerity, and thus  has little room to maneuver. Greece’s creditors in the Eurozone and IMF have  their own limitations on compromising in the austerity required of Athens as the price for more credit to service its massive and unpayable sovereign debt.

We are now at a pint where the can may no longer be kicked down the road. With a debt payment coming due at the end of the month, and the credit required to meet that payment likely to be denied, Greece may very well default on its debt, and be on the way to leaving the Euro monetary union. The impact of such a development, both within the Eurozone and within the broader global economy, may be the pin that punctures the feeble recovery that has barely occurred since the onset of the global economic and financial crisis in 2008.

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Following the prescription of the U.S. Federal Reserve begun under Ben Bernanke, the president of the European Central Bank, Mario Draghi, is about to unleash the monetary torrent that is referred to as quantitative easing. With the Eurozone remaining mired in a sea of economic stagnation, fiscal debt crises and enduring deflation, Draghi  is gearing up the printing presses, boasting that the ECB will succeed where the Eurozone politicians failed.

With a 1.1 trillion euro quantitative easing program about to be launched, which is roughly equivalent to $1.250 billion USD, many in the markets are hoping that the  perceived improvement in American economic metrics  attributed the Fed’s quantitative easing will come to Europe soon.  The massive debts that will never be repaid and the unprecedented distortions created in the U.S. market by those loose monetary policies are at present out of sight. There is such desperation in the Eurozone, amplified by the impotence of the political class, that the ECB is, just as with the Fed in the U.S., the last hope for the European economy.

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The European Banking Authority, in conjunction with the European Central Bank, conducted a stress test of 123 leading banks within the European Union. A total of 24 banks failed the stress tests, which gauges the ability of a bank located within the EU to withstand macroeconomic pressures, which are rapidly accumulating not only in Europe but throughout the global economy. This represents a full 20 percent of all the major banks subjected to the stress test by the EBA and ECB. (http://www.eba.europa.eu/documents/10180/669262/2014+EU-wide+ST-aggregate+results.pdf)

Nine of the banks with failing grades are Italian; three are Greek and another three are Cypriote. Though only one of the banks  on the list of vulnerable banks is Irish (Ireland had previously been afflicted with a major banking crisis, requiring a massive bailout), that institution, Permanent TSB, is one of Ireland’s largest financial institutions. Permanent TSB was found to have a massive €854.8 million hole in its reserves. Overall, the EBA found that the banks surveyed in the stress test were short of 24.6 billion euros in capital reserves–the amount required in their modeling to withstand a three-year recession. This is the equivalent  of 31.17 billion U.S. dollars at current exchange levels.

Since the global economy imploded into systemic crisis in 2008, central banks and regulating authorities in major economies throughout North America and Europe have held periodic stress tests, apparently in an effort to reassure the public in those countries that their banks are in generally good financial condition. There is a suspicion among many that those stress tests are often rigged in a manner designed to present the most favorable indication possible regarding those banking institutions. The fact that this most recent stress tests undertaken by the EBA reveals that 20 percent of the European Union’s major banks are in trouble, and this at a time of economic stagnation throughout Europe, with increasing indications of looming recession, should serve as a warning klaxon on how fragile Europe’s financial health remains a full six years after the onset of the global economic and financial crisis.

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In the past few days the equity markets, in particular the Dow Jones index, have displayed wild gyrations. One day stocks fall sharply, followed by a near equal climb the following day, only to shortly afterwards swing down sharply again. The sentiment-driven swings on the world’s bourses display extreme nervousness  by investors. Increasingly, they are beginning to catch on that the “recovery” was no secular recovery following the  global economic and financial crisis of 2008, but a short-lived stabilization. Now, reality is catching up fast.

For the past few months, there have been indications of stagnation in the world’s fourth largest economy, Germany, which has been the sole force holding together the debt-ridden Eurozone. Now comes the August figures on German exports: a decline of 5.8 percent (http://www.dw.de/german-exports-take-a-deep-dive-in-august/a-17983575), the worst contraction in Germany’s critical export sector since January of 2009, at the worst point of the global economic crisis.

The German export contraction is merely a hint of what is happening globally. Trade growth is slowing, inhibiting the ability of sovereigns to finance their massive structural deficits and cope with record high levels of unemployment. The geopolitical situation is very bad and getting worse, pointing to further erosion in economic confidence. It may be that the global economy is only one major crisis away from another catastrophe, as in 2008. And the sources of that next crisis are everywhere around us: the Islamic State war in the heart of the Middle East; looming tension with Iran over the nuclear issue; border tensions between India and Pakistan;  a territorial dispute in the Far East that pits China against Japan and Vietnam. Then there is the Ukraine crisis, pitting Russia against most of Europe and the United States. On top of the geopolitical flashpoints, there is now the emerging global health crisis involving the Ebola virus. Any one of these flash points can trigger a “Black Swan” event that could plunge all major economies into a severe recession.

While all those negative indicators envelope our world, central banks across the globe are giving increasing signs that sooner rather than later the policy of essentially zero-interest rates will have to be reversed, as the distorting effects  of artificially low rates cannot be maintained in perpetuity. Yet, it has been largely those low rates, in combination with the unleashing of a flood of liquidity, that are largely responsible for the limited economic growth that has occurred since 2008, along with the recovery of the world’s stock markets from their worst losses  incurred during the onset of the crisis.

The mood swings on Wall Street and elsewhere appear to be the tracing of a fiscal and economic electrocardiograph, delineating that not all is well with the global economy, and the warning signals are flashing red. Underlying and reinforcing those fears is the knowledge within the financial community that sovereigns expended so much of their capital in coping with the last worldwide economic crisis, there is little left for policymakers to react with when the next big financial and economic tsunami  strikes the global economy.

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The Eurozone economy is dead in the water, the ill winds of economic recession are blowing and the politicians are dumfounded. Once again, the European Central Bank must step in with radical monetary fixes to cope with the lack of coherent economic and fiscal policy by the sovereigns. With ECB interest rates already at a nominal 0.05 percent–essentially zero interest rate– a  desperate ploy has just been announced.

Mario Draghi, president of the ECB, has made it known that he will now be buying up troubled assets and collateralized debt. The hope is that this will cool off the heat of threatening deflation, while kick-starting the Eurozone economy. If that fails, he will no doubt then resort to quantitative easing.  Stay tuned.

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As with the U.S., the Eurozone has been relying on the monetary drug injected by the central bank to compensate for the failure of politicians to devise and execute effective economic policy. The drug of monetary stimulus can go only so far, and there is a constant stream of data revealing how weak the Eurozone economy is in reality.

The most recent figures from the Markit’s purchasing managers indexes show a decline in the composite average from 52.5 in August to 52.3 September. This is the lowest PMI monthly result since December of 2013.

Other than the increasingly  ineffective policies of the European Central Bank (ECB), and in the absence of economic leadership from the politicians, the sole hope for the Eurozone is the monetary union’s largest economy, Germany. However, the German economy has experienced a slowdown, and the emerging sanctions and economic boycott war with Russia is bound to impose a serious drag on economic growth.

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Six years after the onset of the global economic crisis, and despite trillions of euros in added government debt and unprecedented monetary easing by the European Central Bank (ECB), the Eurozone economy is dead in the water. Unemployment remains disastrously high, and the marginal GDP growth  of some of the smaller Eurozone countries was offset by poor data from France and Germany-the two countries comprise two thirds of the Eurozone’s GDP.

Germany’s economic data was especially bad. The largest economy in the monetary union contracted by 0.2 percent  in Q2 of 2014. In the same period, France experienced zero growth, while Italy entered a technical recession. On balance, the debt and money-printing supported economies of Europe stood  at zero GDP growth in the second quarter of 2014. And the worst may be yet to come. The economic sanctions imposed on Russia over the Ukraine crisis has resulted in retaliatory sanctions, which will inevitably hit the Eurozone in Q3 of this year. In addition, there are warning signs of an economic slowdown in China.  There are ill omens ahead for the Eurozone.

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