Unconventional Wisdom - Europe scores an own goal:: Macquarie Research,

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Unconventional Wisdom
Europe scores an own goal
Event
 European surveys show a more significant hit to growth in 2011 compared to
2010.
Impact
 In mid-2010 it was easy to argue that the sovereign debt crisis in the Euro
Area would not have a major impact on economic growth. 2011, however, is
very different.
 Courtesy of some dubious policy decisions, Europe, especially Germany, is at
risk of scoring an economic own goal.
 A lot will now depend on policy decisions outside Europe and the trend in
currencies such as the RMB. And the complement will be European central
bankers having to abandon thoughts of tighter monetary policy.
Analysis
 In Q2 2010 there was a consensus view that the sovereign debt crisis taking
hold in Greece would spread and that this would have a sharply negative
impact on growth in the Euro Area. Yet for perfectly good reasons, this never
happened.
 Perhaps this resilience has been a factor behind the earlier complacency
about the prospects for economic growth during the second wave of the debt
crisis in 2011. This complacency has come to end as it is now being realised
that the conditions that supported European growth a year ago are not in
place.
 One important difference is the spread of the contagion into bond markets
outside Greece. In 2010 there were mild disruptions in the bond markets of
Spain and Italy. In 2011 the jump in yields in both these markets, but
particularly Italy, has been much sharper. Even though the crisis peak in
yields seems to have passed, 10-year rates in Spain and Italy are still a full
percentage point higher than the prevailing level after the first crisis.