There is an ongoing separation going on between countries that form the European Union.
- Germany (world's largest exporter, 47% of GDP) backed by 2 successful programs to stimulate demand(original cash for clunker, Q209 +0.4%) and reduce unemployment (cut in payroll taxes, Unemployment peaked at 8.3% in August, Down to 7.7% in October) appears to have cushioned the blow from the collapse of global trade. France with Cash for Clunker and government spending appears to also have cushioned the blow from this crisis. Both countries grew their GDP in the 2nd quarter but may run into problems as the government programs get phased out and the rise of Euro reduces export competitiveness.
- Britain is still struggling to get back to growth (Q2 GDP -0.6%), limited by the deleveraging of the British consumers from 2 decades of consumption beyond their means. The modest recovery of property values will moderate the negative wealth effect and help bank balance sheets get towards positive.
- Italy is going through serial recession behavior reminiscent of Japan over the last decade and has also been slow to recover with more limited government action given the high level of current debt.
- Spain (Q2 GDP -0.1%), Ireland are dealing with complete implosion of the property bubble over the past decade that was responsible for much of their explosive growth. Ireland is dealing with a banking problem fairly similar to the US related to drop in property values held on bank balance sheets. Spanish big banks were much more prudent in their lending, so other European and smaller Spanish banks had been fueling this bubble.
- Belgium, Netherlands, Austria are all dealing with severe banking crisis tied to loans to sub-prime US customers and Eastern European loans.
Going into 2010 Europe is in no growth territory unless US consumer & US Dollar comes back with a bang or European Consumers start spending and Banks start to recover from the crisis. Inflation has been modestly deflationary (EU Aug09 -0.2%) and is likely to be low given the high unemployment and unused production capacity. Manufacturers in Germany (PPI Sep09 -0.2%) and elsewhere are seeing reductions in input costs, the rise in crude prices are being offset by rise in Euro.
Government Debt, Currency & Trade
One of keys of the ongoing has been the size of the government rescue package. Germany has enjoyed an interest spread of upto 1% in issuing debt to fund the rescue and so was able to be more generous than other countries like Spain, Ireland that had their rating reduced and UK that is on negative watch, Italy with debt to GDP >100%. Smaller countries like Greece & Portugal have also struggled to sell government debt.
Swiss faced a rapidly appreciating franc that threatened their exports and created problem Franc loans in Eastern Europe. They started issuing dollar debt to weaken their currency and added to the money supply.
Britain spearheaded the money printing (quantitative easing), ECB, Swedish and Swiss Central banks followed suit. The excess money may have offset the destruction of money supply from reduced economic activity but still created serious concerns about future inflation. This has weakened the pound more given the aggressiveness of BOE and Euro strengthened because of lower level of government debt and lower level of printing.
The collapse of trade affected 4 champion exporters (down over 20% YTD)Germany , Switzerland, Sweden & Italy. Cross EU trade has been hit by the UK, Spanish, Ireland consumptions decreases. Global exports have been affected by the US consumer.
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