Posts Tagged ‘Debt crisis’

Eurodammerung?

Wednesday, May 23rd, 2012

Despite Germany’s strong manufacturing output in March, it was not enough to compensate for a slump across the rest of the Eurozone with declining production, a signal that an expected recession may not be as mild as policymakers hope.  Industrial production in the 17 Eurozone countries declined 0.3 percent in March when compared with February, according to the European Union’s (EU) statistics office Eurostat.  Economists had expected a 0.4 percent increase.

The figures stood in stark contrast with German data showing output in the Eurozone’s largest economy rose 1.3 percent in March, according to Eurostat, 2.8 percent when energy and construction are taken into account.  “With the debt crisis, rising unemployment and inflation, household demand is weak and globally economic conditions are sluggish, so that is making people very reluctant to spend and invest,” said Joost Beaumont, a senior economist at ABN Amro.

According to Eurostat, output declined 1.8 percent in Spain; in France — the Eurozone’s second largest economy after Germany — output fell 0.9 percent in March.  Many economists expect Eurostat to announce that the Eurozone went into its second recession in just three years at the end of March, with households suffering the effects of austerity programs designed to slash debt and deficits.

“Industrial production is a timely reminder that first-quarter GDP will likely show a contraction,” said Martin van Vliet, an economist at ING.  “With the fiscal squeeze unlikely to ease soon and the debt crisis flaring up again, any upturn in industrial activity later this year will likely be modest.”  European officials believe that the slump will be mild, with recovery in the 2nd half of this year.  The strong economic data seen in January has unexpectedly faded point to a deeper downturn, with the drag coming from a debt-laden south, particularly Greece, Spain and Italy.

Economists polled by Reuters estimated the Eurozone economy contracted 0.2 percent in the 1st quarter, after shrinking 0.3 percent in the 4th quarter of 2011.  “We suspect that a further slowdown in the service sector meant that the wider economy contracted by around 0.2 percent last quarter,” said Ben May, an economist at Capital Economics.  “What’s more, April’s disappointing survey data for both the industrial and service sectors suggest that the recession may continue beyond the first quarter.”

“It is evident that Eurozone manufacturers are currently finding life very difficult amid challenging conditions,” said Howard Archer at IHS Global Insight. “Domestic demand is being handicapped by tighter fiscal policy in many Eurozone countries, still squeezed consumer purchasing power, and rising unemployment.”  Eurozone governments have introduced broad austerity measures in order to cut debt, and these have undermined economic growth.

European watchers also expect to see Greece exit the Eurozone.  Writing for Forbes, Tim Worstall says that “As Paul Krugman points out, the odds on Greece leaving the Eurozone are shortening by the day.  In and of itself this shouldn’t be all that much of a problem for anyone. Greece is only two percent of Eurozone GDP and it will be a blessed relief for the Greeks themselves.  However, the thing about the unraveling of such political plans as the Euro is that once they do start to unravel they tend not to stop.”

The European Commission hopes Greece will remain part of the Eurozone but Athens must respect its obligations, the European Unions executive Commission said.  “We don’t want Greece to leave the Euro, quite the contrary – we are doing our utmost to support Greece,” European Commission spokeswoman Pia Ahrenkilde Hansen said.  Greece is likely to face new elections next month after three failed attempts to form a government that would support the terms of an EU/IMF bailout.  Opinion polls show most Greeks want to stay in the Eurozone, but oppose the harsh austerity imposed by the emergency lending program.  “We wish Greece will remain in the euro and we hope Greece will remain in the euro … but it must respect its commitments,” according to Ahrenkilde.  “The Commission position remains completely unchanged: we want Greece to be able to stay in the Euro.  This is the best thing for Greece, for the Greek people and for Europe as a whole,” she said.

European Central Bank (ECB) policymakers Luc Coene and Patrick Honohan voiced the possibility that Greece might leave the currency bloc and reached the conclusion that it will not be fatal for the Eurozone.  According to Luxembourg’s Finance Minister Luc Frieden “If Greece needs help from outside, the conditions have to be met.  All political parties in Greece know that.”  There are powerful incentives for keeping Greece stable, one of which is that the ECB and Eurozone governments are major holders of Greek government debt.  A hard default could mean heavy losses for them; if the ECB needed recapitalizing as a result, that debt would fall on its members’ governments, with Germany first in line.  “If Greece moves towards exiting the Euro…the EU would then need to enlarge its bailout funds and prepare other emergency measures,” said Charles Grant, director of the Centre for European Reform think-tank.

Meanwhile, Britain’s Deputy Prime Minister Nick Clegg warned euro skeptics to avoid gloating over the state of the Eurozone as Greece tries to assemble a workable government.  According to Clegg, “We as a country depend massively on the prosperity of the Eurozone for our own prosperity, which is why I can never understand people who engage in schadenfreude – handwringing satisfaction that things are going wrong in the euro.  We have an overwhelming interest – whatever your views are on Brussels and the EU – in seeing a healthy Eurozone.  That’s why I very much hope, buffeted by these latest scares and crises in Greece and elsewhere, that the Eurozone moves as fast as possible to a sustainable solution because if the Eurozone is not growing and the Eurozone is not prosperous it will be much more difficult for the United Kingdom economy to gather momentum.”

A Tale of Two Countries: Germany and Spain

Monday, January 23rd, 2012

Germany’s unemployment declined more than predicted in December as car and machinery exports boomed and one of the mildest winters on record helped construction jobs. The number of jobless people declined a seasonally adjusted 22,000 to 2.89 million, according to the Nuremberg-based Federal Labor Agency.  Economists had forecast a decline of 10,000.  The adjusted jobless rate fell to just 6.8 percent.  German firms are working virtually nonstop to fulfill orders for exports and investment goods.  As a result, the nation has defied a debt crisis that the European Commission fears will unleash a recession throughout the Eurozone.  The Munich-based IFO Institute’s measure of business confidence also rose unexpectedly in December.  Polls show that the majority of Germans see their jobs as secure even as Europe’s biggest economy slows.  Forward-looking indicators including IFO’s underscore that the German jobs motor is fundamentally intact, said Johannes Mayr, a senior economist at Bayerische Landesbank in Munich.

Except for an unexpected 6,000 increase in October, German unemployment has declined in every month since June 2009. The average jobless total in unadjusted terms for 2011 was well below the three million mark, Labor Agency head Frank-Juergen Weise said.  “German unemployment mastered the dual impact of the debt crisis and weakening economic growth in 2011 but these risks remain, accompanying us as we enter the new year, Weise said.

Both the jobless total and the jobless rate were at their lowest level since unification in 1991, noted German Economy Minister Philipp Roesler. “2011 can be described as the most successful since German unification for working people,” Roesler said.  “Demand for labor remains very high, despite the current economic risks.  Overall, the upturn in employment should continue, albeit at a slower rate.  The labor market remains one of the main pillars of our economy,” the minister said.

The national statistics office Destatis reported that the number of employed people in Germany hit a new record of 41.04 million in 2011, with more than 500,000 jobs created.  It was the first time the number of people working in Germany has risen above 41 million, Destatis said.  The nation’s population is approximately 82 million.

“Overall, labor market conditions will remain markedly healthier in Germany than in most other countries in Europe in the months ahead,” said IHS Global Insight’s Timo Klein. At present, Germany is confronting a shortage of skilled labor.  Leading economists anticipate that Germany’s economic growth will slow in 2012, in line with other major Eurozone economies, which may put a squeeze on wages and jobs.  But, unemployment at a record low for the last 20 years, is a position that most countries envy and a sign of the way Germany has rebuilt itself since the Wall was torn down.

“Germany’s manufacturing and export-driven economy finished the year strongly — piling on another 22,000 jobs in December,” said Anthony Cheung of market analysts RANsquawk.  “Behind the strong performance lie some adept moves by Germany’s exporters.  As their Eurozone markets weakened, they have been very good at moving their focus elsewhere.  German carmakers have more than compensated by dramatically growing sales to developing markets.”

This is one reason why companies are not shedding significant staff, even if the economy hits a downturn, said Berenberg Bank’s Holger Schmieding.

Germany’s labor market strength means that domestic demand will “remain a pillar of support” to the eurozone “under very challenging circumstances otherwise,” Schmieding said.  The Eurozone badly needs this help.  For example, Spain again published dire labor market data with the jobless rate rising by nearly 2,000 in December when compared with November.  Eurostat’s most recent data showed October unemployment in Spain at 22.8 percent, by far the Eurozone’s highest.

Spain represents an entirely different scenario.  During 2011, unemployment in Spain soared 7.9 percent, totaling an astonishing 322,286 individuals.  Nearly one-third of all the Eurozone’s unemployed are Spanish; approximately 50 percent of young Spaniards are out of work.  The tough austerity measures outlined by the new prime minister, Mariano Rajoy, are likely to push Spain’s jobless rate even higher.  These include €8.9 billion in spending cuts and tax increases to cut Spain’s borrowing which should total €16.5 billion in 2012.  Spain closed out 2011 with a deficit of 8 percent of its GDP, significantly higher than the six percent reported at the end of 2010.  “This is the beginning of the beginning,” said Deputy Prime Minister Saenz de Santamaria, noting that Spain is facing “an extraordinary, unexpected situation, which will force us to take extraordinary and unexpected measures.”  She stressed that the wealthiest will be increasingly taxed for at least two years, resulting in expected budgetary gains of €6 billion.

These numbers represent a new 15-year high in Spain’s unemployment rate “The figures for the number of registered unemployed for the month of December confirm the deterioration of the economic situation during the second half of the year,” according to Spain’s labor ministry.  Once the Eurozone’s job creation engine, Spain has struggled to find jobs for the millions thrown out of work since the 2008 property bubble collapse.

The bad news fueled fears that Spain, the Eurozone’s fourth-largest economy, was slipping back into recession after the economy posted zero growth in the 3rd quarter of 2011.  Prime Minister Rajoy’s new government has promised to fight unemployment and fix the country’s finances as its top priorities.  Rajoy plans to present a major labor market reform which will alter hiring laws and Spain’s collective bargaining system to encourage companies to hire workers.

Spain’s secretary of state for employment, Engracia Hidalgo, said the successive labor reforms carried out by the previous government “never made the labor market more dynamic and flexible.”  Spain  lets the jobless receive unemployment benefits for a maximum of two years.  Prime Minister Rajoy’s government extended a monthly payment of 400 euros ($520) for people whose benefits have run out.  Otherwise, the payments would have expired in February.

Italian Debt Crisis Rattles Europe’s Third Biggest Economy

Monday, July 25th, 2011

Italian Prime Minister Silvio Berlusconi said he would speed the passage of a 40 billion-Euro ($56 billion) deficit-cutting plan to stop a market selloff that threatens Europe’s single currency.  The “crisis prompts us to speed up” approval of the budget cuts, Berlusconi said since Italian stocks lost nearly 7.5 percent over two sessions and bond yields soared to the highest in 10 years.  Referring to the austerity plan, Berlusconi vowed “to bolster its content and draw up additional measures aimed at balancing the budget by 2014.  The crisis in confidence that has battered financial markets and hit Italy in recent days is a threat for everyone in the Eurozone, the most concrete element of European unity,” Berlusconi said.  He noted that Italy’s banks are “solid” and his government and opposition parties are determined to defend Europe’s third largest economy.  Italy has the world’s 7th largest economy and the Eurozone’s third largest.

The initial signs that Italy was in trouble emerged last week, when investors began dumping Italian bonds and selling off the stocks of banks such as UniCredit that are heavily exposed to Italian debt.  That accelerated  three days after Berlusconi drove worries about Rome’s commitment to the passage of the proposed budget cuts by snarking about finance minister Giulio Tremonti.  ”I think Italy is in a much better position than Greece still, but clearly the Europeans now need to make sure that Italy doesn’t go,” said Jonathan Tepper, partner at Variant Perception, a London research firm.  ”That would be bad, and not just for the Europeans.”

Berlusconi said that the plunge in the country’s stocks and bonds in recent days is a threat for the unity of Europe and the Eurozone.  “The crisis in confidence that has battered financial markets and hit Italy in recent days is a threat for everyone and that effects the single currency, the most concrete element of European unity,” he said, noting that his government and opposition parties are determined to defend Italy and that he is supported by his European Union allies.

“Berlusconi and Co. must back down and give (Finance Minister Giulio) Tremonti full support immediately,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London.  Of all Eurozone nations that are sensitive “to rising debt servicing costs, Italy tops the list, so it can’t afford for this colossal rise in long-term rates to be anything other than very short-term.”

Roben Farzad of Bloomberg Business Week said on National Public Radio’s “All Things Considered”,  “Profligacy.  Look, I mean, the Euro was great.  The Eurozone was great when it all worked out and had this single currency and you can partake in cheaper labor and people going across the borders easily and lower cost of capital for everyone.  But when times are bad, i.e., this great global recession of ours, suddenly you have a dynamic where the haves and the have-nots are exposed for what they are.  And the smaller countries, the more peripheral countries, turns out that they really borrowed beyond their means.  But Italy is the perennial sick man of Europe.  It’s a slow growing economy.  It’s not monolithic.  The south tends to be poor.  The north is wealthier and more industrious and has the majority of the finance and the capital and whatnot.  The problem is, when times are good and risk is perceived as being overrated, you have the international debt capital markets being very easy with loaning money to countries.  And slow-growing countries like Italy and Japan, if you look at their last 20 years, they tend to over-borrow in order to make ends meet.  Believe it or not, Italy is the third most leveraged country in the planet.”

James Walston offers this analysis in the Telegraph.  According to Walston,  “For those of us not versed in the dark arts of accounting or international finance, there is little more solid than money; I have it or I don’t, I can borrow it or lend it and measure it down to the last penny.  But confidence is an altogether different commodity, far more abstract and difficult to gauge.  Italy is trying to persuade us that the world should have confidence in both its political and its financial stability.  It will not be easy.  The ratings agencies’ evaluation of a country’s creditworthiness are one measure of stability; another is investor confidence in the bond markets about Italy’s solvency.  On both scores, the omens are getting worse for Italy day by day.  Until recently, Italy had avoided the worst of the world and European crises.  There was no housing bubble, as Italian banks demand copper-bottomed collateral before they will lend the ordinary house buyer a cent.  There were almost no toxic assets, as banks are amazingly conservative in their investment policies.”

European Central Bank Governing Council member Mario Draghi urged the Italian government to move ahead with further measures to re-balance the budget by 2014.  “The substance of future measures aimed at balancing the budget by 2014 should be defined as rapidly as possible,” he said.  “This is what markets are looking at above all today.”  Additionally, Draghi criticized the European policy response to Italy’s debt crisis, saying policymakers must “bring certainty to the process by which sovereign debt crises are managed” with clearly defined objectives and instruments.  International Monetary Fund economists have urged “decisive implementation” by Italy to cut its enormous public debt, pointing out that its austerity plan is based on buoyant forecasts with measures weighted toward the future.

Ireland Accepts EU/IMF Bailout

Tuesday, December 14th, 2010

Ireland Accepts EU/IMF BailoutAgainst its will, Ireland is now in a state of receivership mandated by the European Union (EU) and the International Monetary Fund (IMF) in an effort to resolve the Emerald Isle’s debt crisis.   European central bankers have paid £111 billion into Ireland’s banks to prevent damage to the euro in what is being jokingly referred to as the “Oliver Cromwell package.”  EU president Herman Van Rompuy described the action as a “survival crisis.”

Irish Prime Minister Brian Cowen will delay any decision on whether to proceed with national elections until the 2011 budget is passed and details of the international bailout package are negotiated “I’m saying that it is imperative for this country that the budget is passed,” Cowen said.  “I’m also saying that it is highly important in the interests of political stability that that happens.  It’s very important for people to understand that any further delay in this matter in fact weakens this country’s position.”

Cowen asked for significant “financial assistance” from the EU and the IMF and promised. spending cuts and tax increases.  This request came shortly after the prime minister said Ireland had “made no application for external support” for its debt-laden banks.  Dublin has spent billions trying to prop up its embattled banking sector.

Ireland is the second EU country, after Greece, to seek outside help to stabilize its finances.   That nation has been under strong pressure from its European neighbors – primarily Germany and France — to apply for a bailout, which they hope will calm investors and prevent a crisis of confidence in the euro.

“It is important that this state continues to fund itself in a stable way,” said Brian Lenihan, Ireland’s Finance Minister, “that economic continuity is preserved, that there is no danger to the borrowing which the state requires.”  Ireland’s low corporate tax rate – just 12.5 percent- — will not enter into the discussion because the country wants to attract large companies.