Lagarde officially declared the EU debt issue a potential 1930 style depression. I think she was referring to the exchange of words, and growing hostility, between France and England. But when I see comments like this from someone high up there in the official food chain, I think of geopolitical instability that happened after the depression.
Everyone knows the game of chicken the Germans and ECB are playing. They are only willing to step in until there is enough pain in the markets to force leaders to enact on fiscal responsibility. (It makes for sucky trading.)
Something that did not get too much press this morning is Germany's willingness to stem their bank issues. Commerzbank will soon be allowed to unload its bad real-estate to a state own private bank. (Nationalization of bad assets.) We basically saw that with Dexia too, but it was France that back stopped it. I think the model of EU bank nationalization has developed.
Bad assets, that can not be unloaded on to the market, will be swallowed by the State. State liabilities will shoot up. If rating agencies are already contemplating sovereign debt down grades, really have no choice. Debt will get downgraded. If not now, soon after these 'stealth' nationalizations take place.
So, that is the obvious negative news that everyone knows about, and everyone has been touting. However, if a depression or world war 3 does not happen from the game of chicken, the decline of the Euro since late Oct/early Nov, may have played a role in stabilizing the Eurozone PMI data. In November we saw a 46.4, and for December we got a 46.9. During this time, the Euro has seen an 8% decline.
Obviously, one data point does not make a trend, but we should continue to see the Euro decline (hopefully in a relatively stable fashion), and facilitate improvement in the Eurozone economies.
A PMI below 50 is not good, and represents a contraction, which suggests a recession, but global markets are already pricing in a recession. The important part is the stabilization.
If the Euro can continue to decline, facilitate economic activity in the Eurozone and if the game of chicken does not result in World War 3, Europe will be in much better fiscal shape.