2nd March 2012
Last night saw a combination of yet more Euro zone summit inflation combined with apparent ennui. In fact the ennui seems to have spread to the participants as being politicians they like to end with bombast and hype about some grand design or other. What we actually got was this from European Commission President Von Rompuy about the proposed European Stability Mechanism or ESM.
"There will be an acceleration…….It could be starting with the payment of two tranches in 2012 but we have to take a definite decision."
So yet again we see promises which are not backed up by reality. And reality may yet be inconvenient to a group of people who feel that a crisis now can be solved by a rescue vehicle (ESM) which will not have its full capital until 2015! Sometimes you really could not make it up.
Greece's bailout: Only the money which bails out the banks will be paid right now
Yes you did read that heading correctly. The Euro zone decided to only bail out the banks right now confirming nicely one of the themes of this blog. So we saw 23 billion Euros put aside to recapitalise the Greek banks and 35 billion Euros to allow them to continue to access liquidity from the European Central Bank. In addition to this some 35.5 billion Euros was put aside to sweeten slightly the sour taste of the Greek debt haircut deal (assuming presumably that it happens….).
For Greece's people,however, there is nothing on the excuse that her latest 300 million Euros of austerity is incomplete. Of course the banks who have blasted money everywhere do not seem to find themselves facing any such criteria.
Meanwhile in Greece austerity bites again
This week has seen approval of a further 3.2 billion Euros of austerity in Greece which leads to the question how will her economy recover when demand is being reduced? We are back to my theme of a vicious circle where austerity leads to economic weakness leading to a need for more austerity.
If we look at some of the cuts we see reductions to state pensions where monthly pension payments above 1,300 euros will be reduced by 12 percent and, so-called supplementary pensions (which are paid for out of workers' own contributions) will be cut by up to 30 percent. In addition to wage freezes for some we will also see the standard minimum wage reduced by 22% to 751 Euros a month.
Frankly this is likely to make a weak economy even weaker.
What is the latest on the Greek economy?
Here the news remains grim and from Greece's statistics agency we received this.
"The retail trade volume index, including automotive fuel, decreased by 12.7% in December 2011 compared with December 2010. The Index in December 2010 recorded a decrease of 19.4% compared with December 2009."
As you can see pain is being piled on pain here. The underlying index is at 90.6 where 2005=100 and this is worse than it may look because December is by far the best month for retail sales in Greece and January's number is likely to head towards 80.
Not exactly an environment to add wage and pension cuts is it? I feel for what they may do here.
Inflation is also a problem
If you wrote a computer programme for an economy using conventional economics and feed in the economic growth figures and retail sales for Greece you would probably blow it up with the numbers below.
"The Producer Price Index in Industry (PPI) in January 2012 compared with January 2011 recorded a rise of 7.5%. The index in January 2011 had recorded an increase of 7.3% compared with January 2010.
The PPI in January 2012 compared with December 2011 recorded a rise of 2.7%."
So we would be at risk from the computer of behaviour like HAL in the film 2001 as perhaps it too feels that it has been lied too…
If you at the underlying picture here you see that there has been a surge in producer price inflation over the time of the Greek crisis. The underlying index (2005=100) is now at 136.6 but in January 2010 it was only 118.4. Poor old HAL has another problem.
That's the past what about the future?
The most up to date data has come from the Markit purchasing managers survey which needs to come with the economics equivalent of a watershed.
"The Greek manufacturing sector fell deeper into recession during February as both output and new orders declined at series-record rates.
Underlying the steep deterioration in operating conditions in February were the most severe reductions in output and new orders recorded in nearly 13 years of data collection."
Has the policy of bailing out the banks worked?
"evidence that difficulties in accessing working capital to purchase raw materials had exacerbated the decline since January. ……There were also reports from panellists in February that vendors were demanding cash payment for the delivery of inputs…….companies sought to lower the cost of holding excess stock at their plants."
I think that we can safely say that the bank bailouts have given little or no benefit to the underlying economy of Greece. Indeed the PMI reading of 37.7 implies further weakening in Greek manufacturing (50=unchanged) and is the lowest reading since the survey began in 1999.
Also there looks to be little hope for help from the export sector.
"new export orders fell for a sixth successive month and at the steepest pace since May 2010."
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