Euro summitry hype clashes with industrial production reality in France, the Netherlands, Italy and Spain

10th July 2012 by The Harried House Hunter

So we start today with the latest Eurogroup summit grabbing some of the news headlines. However before I dip into the details and indeed flaws exposed let us look for the usual hype that accompanies such agreements. We do not have to look far as we find it in the first line of the Eurogroup Statement.

In line with the Euro Summit statement of 26 October 2011, the Eurogroup will prepare the Euro Summit meetings and ensure their follow-up.

As we consider that “follow-up” is invariably exactly what they have not done this is not the best start! And of course it becomes a candidate for my financial lexicon. And somewhere in an alternative universe or as Star Wars put it “in a place far far away” these next two points may seem reasonable too.

ever closer coordination of economic policies

financial stability in the euro area

Meanwhile in the real world economies diverge even more widely and the Euro area could not be less stable without actually breaking up! Perhaps this is a scientific experiment to examine the dangers of sleep deprivation…

What did they say?

There was an admittal of reality here.

The Eurogroup supports the recently adopted Commission recommendation to extend the deadline for the correction of the excessive deficit in Spain by one year to 2014.

Actually the chances of Spain achieving the target (budget deficit of 3% of Gross Domestic Product) in 2014 are not that high but they are better than the zero chance that 2013 has. The problem remains the weakening trajectory of her economy as falling GDP raises the deficit and reduces the GDP you divide it by. If you want a case study of what a disaster that can be then Greece has provided it.

Only yesterday I discussed the promises made by Presidents Barross and Van Rompuy on the 24th of May that economic growth would be a priority at future summits. It must have slipped their mind last night as the subject is not mentioned in the statement.

It now seems clear that the bailout of Spain’s banks will come from the European Financial Stability Facility or EFSF, or my unstable lifeboat. They seem determined to drive it forwards into a zone where it could easily founder. At least for now it appears that it will only have to provide some 30 billion Euros which it might manage with the help of the European Central Bank. Although a central plank in a successful bailout has been broken already as admidst the hype they have forgotten that you should start with too much ammunition rather than too little. You might have thought that they would have learnt from making this mistake before (Greece, Ireland, Portugal…).

Also if you praise Ireland as “well-performing” then it is very noticeable if you do not describe Portugal as such! And of course we are back to that Orwellian phrase “on track” with all of the disturbing implications that it has come to represent.

Confusion over sovereign liability remains

During this process I have found myself in a lonely position arguing that if a country borrows money then in general it should count against its national debt. Many bought the hype that it could somehow be invisible and/or ignored. With thanks to the Wall Street Journal for its interview I present the words of the German Finance Minister Wolfgang Schauble who illustrates the inconsistency of such an argument.

We expect that the final liability of the state will remain

It might look as if he fully agrees with me with those words but not quite as he goes on to say that apparently you can be liable for something that does not count. Sounds like a politician’s fantasy world doesn’t it?

Let us now move to economic reality

Today has brought us some update on the economies in the Euro area as we have seen industrial production figures released. Let us examine them.


This starts hopefully.

In May 2012 the industrial production index seasonally adjusted increased by 0.8% compared with the previous month.

But then with some perspective we see a grimmer reality emerge.

The percentage change of the average of the last three months with respect to the previous three months decreased by 1.9.

The unadjusted index of industrial production decreased by 6.8% compared with May 2011.

You might think that with such numbers economic growth should be at the forefront of Euro area officials minds.


La Republique has also updated us this morning on its latest production figures.

In May 2012, manufacturing output decreased in volume (-1.0%). It had decreased as well in April (-0.9%).   Output decreased more sharply in total industry (-1.9%).

So a couple of weak months and if we look for some perspective we see this.

Manufacturing output decreased by 2.2% (y-o-y).

If we look further back we see that on a scale where 2005=100 French industrial production is at 90.8 and manufacturing production is at 89.8.


We see something interesting here and it relates to two of the themes of this blog. Firstly we see yet again signs of weakening economic growth in 2012 in both Italy and France. But secondly we see that contrary to the grand claims of the summit above of “closer coordination” we in fact see that the evidence is increasingly questioning whether France can be considered to be a “core” Euro nation anymore. If we look at the recent evidence her similarity to Germany has reduced in 2012 has progressed. To say that she now looks like a peripheral nation is going too far for now but if we consider that her share of the EFSF is 20.4% then we can see how much it would be affected by any recalculation of France’s position.

The Netherlands too?

If we are considering core Euro nations then the Netherlands (often called Holland in the UK) is invariably inked into the list and one part of today’s numbers backs that up.

In May 2012, the output level of manufacturing industry was more or less equal to the level reached just before the economic downturn at the end of 2008.

But even here the more recent picture is showing signs of weakness.

After correction for seasonal variation and the number of working days, manufacturing output in the period April-May was more than 1 percent down from the period February-March

The average daily output generated by Dutch manufacturing industry in May 2012 was 0.5 percent down from May 2011

And we can add in that industrial turnover or sales was 3.7% lower in May that April. So the weaker output trend looks likely to continue. And the concept that the Netherlands is weakening too poses another challenge for the Euro area. For it would appear that its bailout mechanisms or lifeboats (EFSF/ESM) will be assuming the heavy lifting of the peripheral nations debts just as even its strongest economies are going through a weaker patch. As Snoopy from the Peanuts cartoon series was fond of putting it, Good luck with that….


If we return to the main subject of the Euro summit which was Spain we saw another dose of economic reality hit her on Friday.

The interannual variation of the Industrial Production Index for the month of May is –5.4%, almost three points higher than that registered in April

There is plenty of food for thought in -5.4% being a better number! But 2012 so far has demonstrated this.

The average rate of the IPI stands at –6.1% in the first five months of the year

It was in fact September 2011 when Spanish industrial production turned negative and the underlying index is now at 82.4 where 2005=100.


Whilst Euro area officals and politician’s try to come up with ever more complex off balance sheet agreements to hopefully solve their debt problems they have ignored the real problem they currently face. In President Clinton’s famous campaign phrase “It’s the economy stupid!” All the financial engineering in the world- which so far they have not been good at anyway- will not solve the problems caused by the current decline in Euro area economies. This varies from a weakening in some like the Netherlands to  outright collapse in Greece but it is now present everywhere in the Euro area. And just in the last sentence we are reminded yet again of divergence rather than the promised convergence.

Also just a thought but has Greece now been erased from comment? Out of sight out of mind?


10 thoughts on “Euro summitry hype clashes with industrial production reality in France, the Netherlands, Italy and Spain”

  1. Jason Aris says:

    Shaun while I agree that the Euro is excaberting the problems the underlying productivity and gross public/welfare sectors in these countries (and in the UK too) are what is really at the root of the issue.

    The West has dined out on past glories and now expects a standard of living denied to most of the rest of the world. The chickens are coming home to roost and we can longer just go and steal (empire) what we require to keep us in the standard we have come to expect.

    There are going to be lots of very unhappy people in the coming years.

    1. Anonymous says:

      Hi Jason

      I am afraid so. I guess the musical metaphor for this would be Bob Dylan’s A Hard Rains Gonna Fall…

    2. Anonymous says:

      OK, but the standard of living for the vast majority of people has not been that great, if this is to deteriorate to something much uglier, ultimately people will radicalise to extreme right or left so that the rules of the game change and get revenge from the few that actually benefited enormously during the boom years.

  2. Andy Zarse says:

    Apropos of Spain, a little light entertainment (via Zerohedge) from Spanish (Austrian) economist
    Pedro Schwartz:

    “Often Nobel prize winners are tempted to pontificate on
    matters that are outside the specialty in which they have excelled,” noting “the
    mantle of authority whereby what ever they say – whether sensible or not – is
    accepted with resignation from some and enthusiasm by others.”

    The relevant bit starts at 35mins 30secs and is in English. I don’t
    think Krugman liked it up him, see him lose his cool at 48.30! Some great entries for the lexicon in this!!!

    1. Anonymous says:

      Hi Andy

      Thanks for the link. It was interesting to see Paul Krugman challenged rather than fawned over. It is perfectly valid to ask why the supply side is virtually irrelevant and invisible in his analysis. The bit I would have liked a real debate on was this.

      “They ( presumably Paul Krugman et al) got us into this mess but we have to sacrifice our principles to get out of it”

      I note that in his response PK failed to address this at all.

  3. The_forbin_project says:

    ah Shaun , the economy !  nothing can grow exponentially upwards!   there’s going to be no growth  –  unless the man in the street gets more money in their pocket 

    and that cannot happen

    you cant increase wages as that will lead  to jobs going abroad – we signed up to that little gem in the supposed “free market” trade agreements   ( never was one , never will be –  all markets have costs )

    you cant cut taxes  either because then you cant pay the bills – which is the problem at the moment as we need to raise them to pay the bills we have…..

    increase productivity  means investment , that might work but that costs as well  and nobody apparently has any money spare – including the top 1%

    interesting figure that 1%  – close to the inner party figure <1%  of Big Brother….

    ah interesting times

    let see if I get accused of being a ranter this time ! 😉


    PS : glad  you enjoyed your holiday  -cant afford one my self this year  :-(

    PPS:  your right , Greece still needs to be watched – burning embers can relight….

    1. Anonymous says:

      Hi Forbin

      As we stand it looks as though we are going to find out what the effects of sustained slow/no economic growth are. Let us hope that we can avoid sustained reductions…

  4. Rods says:

    Hi Shaun,

    Another excellent blog. I’m glad that you had a good holiday.

    All these Eurozone Summits remind me of the cartoon Dilbert. Lots of clever plans but nothing useful ever seemed to happen, due to each character having their own agenda. I will let you decide who is the pointy-haired boss!

    It is going to be interesting to see how the German Constitutional Court rules on the ESM. Will the Euro end up overwhelming the German economy? With TARGET2 now at €729bn previous bailouts leaving a €350bn liability and the ESM funds another €200bn, that is the best part of €1.3tn. I’m sure this will keep increasing and what happens when to Euro collapses and they don’t get their money back? Not to mention the German bank’s liabilities on top of this.

    Much like the gold standard in the 1930’s, the Eurozone is fixed to the German productivity and costs standard and with a few northern exceptions they are not competitive. There is no flexible exchange rate to make up the difference.

    There has been much talk of the PIIGS gradually leaving the Euro but will it unravel from the North? If Finland leaves will they be followed by Germany? I have seen some interesting comments by Germans, saying Finland leaving would give them an exit route as for historical reasons, they msh be seen as good Europeans and can’t be seen as the first to leave the Eurozone.

    With much of the world having much lower costs than Europe and catching up technologically, there is much greater global competition. With a fast slowdown in the Global Economy with the possible exception of Germany and the Netherlands, I can’t see any other change but continued industrial contraction in Europe and the Eurozone. 

    How is the Eurozone, the rest of Europe and also the USA going to compete when all of the Governments are currently increasing cradle to grave social costs and at the same time trying to control deficits through tax increases and austerity. Next year the USA is due to begin a major austerity program, how will that effect industrial production and job creation there, where it has been very poor growth compared with the stimulation applied to the economy?

    The frightening thing is that where all of the economists have predict recession / poor grown this year, next year will be better and the year after that above trend, since 2008, we might look back on 2012 as being one of the better years in the depression with the economic storm clouds now gathering, 2013 may turn out to be the year of the ‘Perfect Economic Storm’.

    1. Rods says:

      Hi Shaun,

      It looks like a ruling in Germany on the ESM could according to the judge take up to 3 months. Not good for a fund that was meant to start this week. Looks like your unstable lifeboat the EFSF is going to have to bob around all at sea for a bit longer!

      1. Anonymous says:

        Hi Rods

        Yes my unseaworthy lifeboat is coming under more and more pressure. Not only are there Spanish banks to bail out but more money will be needed in Greece Portugal and probably Ireland. And Senor Monti showed today that suatained sleep deprivation can led to mistakenly telling the truth….

        “It is very difficult to say that Italy will never need help from one fund or another and caution compels me not to talk about such things,”

        If they all occur you will find the EFSF next to the Beatles Yellow Submarine. 

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