For the past two weeks, my weekend summaries have focused on Europe. The reason is simple – events in Europe are and will continue to affect the global business, financial and economic systems.
Most economic theory subscribes to the notion that monetary (currency) and fiscal (government) operations must work together – and in Europe, they were operating independently. Mix in poor economy, a banking system on the edge, and a sovereign debt load in some countries which is beyond repayment – and the situation was deteriorating rapidly.
Econintersect continues to highlight the issues and opinions from a wide range of economists including Dirk Ehnts, Michael Pettis, Elliott Morss, Warren Mosler, John Muellbauer, Keiko Murata, Pippa Malmgren, LEAP/E2020, James Hamilton, Michael Hudson, Menzie Chinn and many others (see opinion posts and analysis posts).
The situation as I post this according to the BBC:
Last night most of Europe’s governments gave up a chunk of their sovereignty. In the future, tax and spending plans will be shown to European officials before national governments.
There will be automatic sanctions against those countries that overspend. A monetary union has moved towards being also a fiscal union.
As a result of the late-night negotiations, there is now a two-speed Europe. French President Nicolas Sarkozy accepted that. He said it was “the responsibility of those who opted out of the single currency”.
Several countries outside the eurozone had argued passionately against a Europe of the “ins” and “outs”, of two categories of membership. That, however, is what happened.
Europe’s leaders failed to agree a change to the EU treaties. Instead the new rules will be adopted and implemented through an inter-governmental treaty.
UK appears to be the “out” country for now (I expect some buyers remorse from other eurozone members). The agreement does not address poor economy, a banking system on the edge, and a sovereign debt load in some countries which is beyond repayment. Hard to balance a budget, repay debt whose maintenance cost goes up daily, and save a banking system when government revenues are contracting.
Europe is Europe. It is not the USA or Japan or a BRIC. It is a collage of ideologies. Think of a canoe with the rowers each trying to paddle in a different direction. History shows you can make bad solutions work - but the paddlers must be rowing in concert.
The eurozone is a confederation of 27 independent countries which 26 have seemingly just agreed to give up a few more sovereign rights to maintain a free trade zone and a common currency. But they still are 27 independent countries with 27 different situations.
Yet, there are signs that the eurozone was adjusting without Keynesian style intervention using monetary policy. In the old world of backed currencies, the economic correcting mechanism for countries performing poorly was deflation of goods and services to regain competitiveness.
Conversely, prices of goods and services in countries doing relatively well inflated. According to a Business Insider post quoting SocGen analyst Klass Baader:
In Q2 2011 (latest data) Germany exhibited the fastest hourly wage growth anywhere in the euro area outside of Slovakia, and at 4.8% yoy substantially higher than the euro area average of 3.6%. Austria, too, which experienced very low ULC [unit labor costs] growth in the first ten years of EMU, is showing above average increases (4.0%).
Meanwhile, at the other end of the spectrum, the weak peripheral economies are undergoing sharp reductions in wages, in defiance of the notion of nominal wage rigidity. In Greece and Ireland wage growth was running at -3.7% and -3.5% yoy – and note that these figures exclude public administrations, where substantial wage cuts have been implemented. So, the steep declines in ULC in Ireland and Greece were the result of both higher labor productivity – achieved mostly through redundancies – and lower wages. In Portugal, wage growth has also dipped into negative territory in the most recent quarter, and has averaged zero in the first half of the year.
click to enlarge images
No country yet has shown the way to resolve this global debt crisis which continues to erode the global economy – the USA papered over the problem, Japan continues to ignore it, and Europe schedules a lot of meetings.
If this agreement holds – Europe has chosen the path of austerity. In some ways this can be viewed as bloodletting to cure illness. But it is a plan, and if all the rowers cooperate – there is a chance of success.
But this austerity approach requires time to gain traction, and the eurozone does not have enough weapons to fight the strains of detoxing from debt or poor economic conditions or shaky banking system which will worsen with austerity.
More Euromeetings to come.
Economic News This Week:
The Econintersect economic forecast for December 2011 predicts weak but improving economic growth.
ECRI has called a recession. Their data looks ahead 6 months and the bottom line for them is that a recession is a certainty. The size and depth is unknown. Although Econintersect’s data is not recessionary (one month look-ahead) – we take this recession call seriously. This week the actual level of ECRI’s WLI index was “less bad” – but as the graphic shows below, the index has been in a range between -7.4 and -7.8 for the last four weeks. However, this index is still indicating the economy six months from today will be worse.
Lakshman Achuthan (ECRI’s chief) has defended his recession call this week on Bloomberg.
We have not switched our call. If there is no recession in Q4 or first half of 2012 then we are wrong. You will not even know if we are wrong until a year from now. ….. So far we are talking about coincident data, production and jobs. Forward looking data since I saw you two months ago has remained weak, and is getting weaker. To my fellow forecasters out there, I’d say they are roughly in two camps. There are those who say the economy is firming and will continue to firm into next year. We reject that. There is nothing here to suggest that at all. There is a larger camp that says we are going to “muddle through” with slow growth. I would point out that has never happened. We never “muddle through”.
Initial unemployment claims fell 23,000 (from 404,000 which was revised up from a preliminary 402,000 last week) to 381,000. Looking back, the last time initial unemployment claims were this low was in mid-2008.
Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background here and here). The real gauge – the 4 week moving average – fell slightly to 400,000. Because of the noise (week-to-week movements from abnormal events), the 4-week average remains the reliable gauge.
Overall the data this week continued to show a weakly improving economy. There were no recessionary flags. The global markets continue to react to developments in Europe.
Weekly Economic Release Scorecard:
|USA Employment: Has the mal-investment bubble deflated -time for growth|
|Preliminary December UM Consumer Sentiment: Rises to a six month high|
|October Trade Balance: Trade is showing little sign of a global recession|
|USA China Economic Review: China is holding $3 trillion in reserves|
|October Consumer Credit: Small Growth but mostly fueled by student loans|
|October Wholesale Sales: Strong, even inordinately strong against other releases|
|Great Debate: Krugman vs Summers – Will the USA mirror Japan?|
|Healthcare: USA cost now at $8160 per person and rising|
|Global Warming: Non-linear climate change should be a worry.|
|November ISM-Non Manufacturing: Index erodes but key elements up|
|October Manufacturing New Orders: Up slightly, not recessionary|
|Climate Change: A study of the economic effects of climate change|
|Housing Affordability: Is a cheap house a good house?|
|China: Was its growth model fueled by misallocation of resources?|
|Mergers and Acquisitions: A look at what is going on in Canada|
|Eurozone Summit Week: Failure to act means that it might already be too late?|
|Market Surge: Is it time to jump in the market?|
|Fed’s Expanded Swaps: Should investors be concerned the Fed try to save the world?|
|Market Movers: A look at developments that move stock values|
|Corporate Balance Sheets: Are they actually the strongest in history?|
|Gold: A current look at the miners|
|Unemployment Rate: Do the Media or the politicians understand?|
|Europe: Transition From Social Democracy to Oligarchy|
|Emerging East Europe: Will it follow 1997 Emerging Asia?|
|Bankers: Are they causing a backlash of activism and legitimacy?|
|IMF: Is Europe lending to IMF which lends back to Europe printing money?|
|Evolving Markets: Do we really understand where we need to go to improve returns?|
|Saving the Euro: Are there silver bullets?|
Bankruptcy This Week: Dynegy Holdings (DH), Privately-held Northampton Generating, Clare Oaks
Note: An observation on the subject of the recent bankruptcies by The Turnaround Letter:
After a long dry spell with few significant bankruptcies, we’ve seen four large public companies file for Chapter 11 protection in the last three weeks: MF Global Holdings (total assets of $40.5 billion) on October 31, Syms (assets of $271million) on November 2, Dynegy Holdings (assets of $9.9 billion) on November 7 and General Maritime (assets of $1.8 billion) on November 17. Taken together, these four filings represent more assets going into Chapter 11 than all of the other bankruptcies over the preceding 19+ months combined.
Each of these bankruptcies has its own unique causes, and there are few, if any, common threads among them. Nonetheless, these four high profile Chapter 11 cases could be significant just because they have gotten people thinking about bankruptcy again. We’ve been through a nearly two-year period when it’s almost been hard for large companies to fail because so much liquidity has been available from Wall Street. These four big cases serve to remind both debtors and creditors that bankruptcy is an option–and often the preferred option. As a result, we could see more significant Chapter 11 filings in the months ahead.
Failed Banks this Week: None