Posts Tagged ‘angela merkel’

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There are two types of haircuts people dread. One involves a barber called Sweeny Todd and pies. The other involves debt. Of the two types of haircuts, the former never seems to be justifiable, the latter can be. And would you believe it, the latter may be back on again for the euro area. It is the story that the powers that be in the euro region want to die. It is the story that won’t die because when it comes to facing up to reality, euro leaders are as clueless as Bruce Willis’s pate is hairless.

Wolfgang Schaeuble, Germany’s finance minister, has owned up to a truth. Hard data tells an even more unpalatable truth, but the great and good in the euro area seem to be unable to spot this truth even when it is staring them in the face

Elections are difficult, and for those at the top in politics they are especially challenging. You can feel sorry for Wolfgang Schaeuble. The German election is but weeks away, and Mr Schaeuble was on the campaign trail. No doubt he was pressed hard; no doubt he would rather have kept quiet, but it spilled out anyway. Greece, admitted Mr Schaeuble, will need more money. But, he added, it won’t have any more of its debt cancelled. It won’t, to use the emotive word that has come to mean debt write-off, experience a haircut. Meanwhile, Capital Economics has done some number crunching and drawn conclusions to make the hairs stand up on the most follically challenged person.

Let’s assume that Greece, Spain, Portugal, Ireland and Italy can maintain their future fiscal deficits at their expected 2013 level. Then, according to Capital Economics, in order for each country to reduce government debt to 90 per cent of GDP within 20 years they must average annual growth of 5.4 per cent, 6.5 per cent, 6.0 per cent, 7.5 per cent and 3.0 per cent respectively. If they could somehow find a way of moving their primary fiscal budget into balance (primary in this case means before interest), the required growth would be 5.4 per cent, 2.3 per cent, 4.7 per cent, 4.1 per cent and 3.0 per cent.

In other words, the only way they can realistically bring their debt down is if the economies manage a pretty remarkable 20 years of impressive growth. What they really need, of course, is one of those haircuts, and investment. Or do they?

The EU’s economic and monetary commissioner Olli Rehn said that what Greece needs is more time. No new money, no haircut, just more time to repay its debts.

Angela Merkel chose to avoid the topic, and just to answer the question: will Greece need more money? she said, again on the campaign trail: “Greece has been making very, very good progress in recent months and we want that progress to be continued.”

Well is it making progress? Most of us had that written about us in our reports when we were at school. “Making good progress,” may be appropriate when applied to a seven year old, but it seems a tad patronising when applied to Greece.

The truth is that the Greek crisis just goes on and on. And it will continue to go on and on, because its targets are impossible. What it needs is a cheaper currency, less debt and more investment. Maybe it can get away without the cheaper currency if there were more money transfers between Germany and Greece. Then again, you only need to look at how some regions of the UK are impoverished to see how even full political union cannot fix the problem of regional economic disparity.

Sorry, to repeat a message that was stated here three years ago. But the euro is very much a part of Greece’s problem, and no matter how many haircuts it receives; no matter how much investment it obtains, without a cheaper currency the recovery may never happen.

© Investment & Business News 2013

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Good news, it appears, comes in threes. For Spain, it most certainly has been a hat-trick, and we are talking football. If you like your forecast to be made via the prism of half-full crystal balls, then this may be reason to celebrate. Cynics may think differently, however.

Firstly, an index out earlier tracking Spanish manufacturing hit a 24-month high. The latest Purchasing Managers’ Index (PMI) for Spanish manufacturing and compiled by Markit hit 48.1 in May. Now that is news to please both pessimists and optimists. The optimists are celebrating because that was the highest reading since May 2011, and before Spain was in recession. The pessimists remain glum, however, because any reading under 50 is meant to correspond with contraction.

In other words, Spanish manufacturing is still shrinking, it is merely doing so at a slower rate. But then things don’t turn around overnight. The trend has been clear for some: the Spanish manufacturing PMI has been steadily improving. If the upward trajectory continues, then that will be bona fide good news.

Secondly, Spain posted its first trade surplus ever in March. Or at least it was the first surplus for as far back as the records go. Exports jumped 2.7 per cent, perhaps supporting the findings of the PMI. On the other hand, imports fell 13 per cent, that was the main factor behind the trade surplus, and is it really a good idea to celebrate the fact that Spanish households are so under the cosh that they can’t afford to buy foreign goods?

Thirdly, Spanish unemployment fell in May, with 98,286 joining the Spanish work-force. That is good news, of course it is, but not wishing to rain on Spain’s parade, it should be pointed out that Spanish unemployment is currently 26.8 per cent. So Spain needs to see several million more jobs created before it can celebrate. In any case, the main factor behind May data was the tourism trade, and that is seasonal, meaning May’s boost may prove to be a one-off.

Looking at the bigger picture, it does rather look as though Germany is now exporting its economic model to Spain, and there are some parallels between Spain today and Germany during the early stages of the Schroder reforms.

You may recall in the late 1990s and early noughties the German economy looked a lot like Japan, a once seemingly unbeatable economic machine appearing all beaten. But Gerhard Schroder, then Angela Merkel made tough reforms. They hurt. German wages fell;corporate profits in Germany rose. Right now, many Germans are unhappy about bailing out the rest of Europe because they see no sign that indebted Europe is willing to make the kind of sacrifices they themselves made ten years or so ago.

But is the so-called Germanification of Europe such a good idea? The result of rising German company profits was, in fact, a substantial rise in Germany’s savings, and as investment did not rise in tandem with savings, the result was German money flooded abroad, boosting asset prices in, among other countries, Spain.

The global economy, perhaps even Europe, cannot afford to see a rise in planned savings without a corresponding rise in investment. For the global economy, savings must equal investment. This is an economic truism. If savings rise, but investment does not, there must be an immediate offset. Either some sectors of the economy must run up debts equalling the short fall between savings and investment, or the economy must contract.

Either way, aggregate savings must equal aggregate investment. Germanic economics, when applied globally, may lead to global recession, even depression.

© Investment & Business News 2013

China is not happy with the EU, the EU is not happy with China, and the British Solar Trade Association seems to side with China.

The EU has imposed anti-dumping duties on China’s solar panel exports. China has responded with tariffs on Europe’s wine exports.
Actually, this is the EU compromising. It is phasing in the tariffs much more slowly than originally intended, and they will, in any case, be at a much lower rate.

The EU says China is using subsidies to sell its panels on the cheap, and reckons they should be some 88 per cent more expensive.
On the other hand, the solar industry has received large subsidies in Europe, too.

Ray Noble, PV Specialist at Solar Trade Association (STA), reckons that the real problem for the EU is that the European industry has not invested as much as it should have. It has taken the money from subsidies, and, as it were, run. China has invested far more and consequently enjoys greater scale. That is why it can sell panels for less money than European companies.

STA CEO Paul Barwell recently said, “If duties are imposed, panel prices will rise across the board, and consumers and installers alike will lose out. It makes no sense to safeguard 8,000 manufacturing jobs by sacrificing up to 200,000 jobs in the wider industry.”

Mr Noble said, “I suggest David Cameron and Angela Merkel work together to sort out these absurd rules and remove this lingering market uncertainty, so that industry can get on with installing low cost, clean and affordable solar energy.”

© Investment & Business News 2013

The political entanglements in the euro area are escalating. Last week a triumvirate of finance ministers from Germany, Holland and Finland put a rather large spoke in the wheel. You may know that during the summer it was agreed that Spain’s banks could be bailed out directly by the IMF, EU Commission and the ECB via the organisation called the European Stability Mechanism (ESM).  But last week the three finance ministers issued a statement saying: “The ESM can take direct responsibility for problems that occur under the new supervision, but legacy assets should be under the responsibility of national authorities.”  So what was that: “legacy issues”? What does that mean? Were they referring to bank bail-outs that occurred some time ago, such as Ireland’s? If this is the case, their statement seems pretty reasonable. Alternatively, were they referring to the bail-out of Spain’s banks? Many interpreted it that way, leading to claims that Spain had been betrayed.

Meanwhile, Helmut Kohl – who as you may recall was German Chancellor during German reunification, and an out and out supporters of the euro – made a speech in which he said of Angela Merkel: “She is destroying my Europe.” He called for giving Greece more time to make its reforms.

Then there was Vaclav Klaus, President of the Czech Republic. When his country joined the EU, its leaders signed a treaty agreeing to also join the euro at some point in the future. But the treaty imposed no time frame. So when did Mr Klaus think this will happen?

“Perhaps in the year 2074 we can join the European Monetary Union,” he said last week.

So that wasn’t very nice about the euro, was it?

In the UK, calls for a referendum on staying in the EU are growing, and the talk is that David Cameron will pledge to hold such a referendum if he wins the next election.

That’s the snag. Either the euro falls apart, which – according to many – will be a disaster for the world economy, or we see closer political union, which will probably leave the UK’s membership of the EU in tatters.

But there is a third way. The euro could survive, without political union.

Also see the following related articles:

Is there hope for the euro? Catalonia’s rift with Spain
Spain’s woes are not down to debt
Catalonia’s strife; currency’s knife
Political shenanigans in Europe
The fix to the euro crisis

©2012 Investment and Business News.

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