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?