Posts Tagged ‘Italy’

DCF 1.0

Fear. In different times greed is just as important. But right now, and across most of Europe, fear is the key driver. Money sloshes around, and all that those who control it want to do is limit the downsize. They are trying to mitigate against fear. And so afraid are they, that at times they have put money in assets that give negative interest rates, just to feel safe. This has been rather good news for Germany, because while fear has driven money away from Greece and Spain and co, making the government cost of repaying debt in these countries seem prohibitive, in Germany it has been quite different. Fear has boosted Germany coffers. And a new report tells us that the boost has been dramatic. This is why.

The euro crisis just won’t go away. In Germany they are sick of it too, and with good reason. Germany has done nothing wrong. Its work force has worked hard, saved for retirement, and what is wrong with that? Yet they are being punished; they are told that to atone for their sins of working hard and saving for the future, they must pick up the tab for indebted Europe. Yet, there is another way of looking at this, according to data produced by Germany’s own finance ministry, because the country has made a tidy profit from the euro crisis.

It all boils down the fact that money has to go somewhere. Corporates are saving. Across much of Europe, households are saving. Where does the money go? One thing is for sure, putting it in Greek bonds is risky. Spanish, Italian and Portuguese bonds don’t seem much safer either. But German bonds, in contrast, feel as safe as a safe house in a land with no crime. In fact so safe are German government bonds or bunds, perceived to be, that there have been times when the yields on some of them have been negative. So actually, Germany has done rather well out of fear created by the euro crisis – or should that be the other way around – a euro crisis created by fear? But can we put a number on how well?

German Social Democrat Joachim Poss wanted to know how much, and, as a man in power, he got an answer. The Germany finance ministry responded to Poss’s question by getting the abacus out and making some calculations. The ministry took its estimate for interest payments on its debt, and subtracted from that the actual interest. From its calculations it drew the conclusion that between 2010 and 2014, it will save 40.9 billion euros thanks to interest rates being lower than expected, which is thanks to money flooding into German bunds for the sake of safety.

This is a rather important point. Right now, Italy is posting a primary budget surplus, meaning its government is spending less than it receives before deducting interest on debt. If it was paying the kind of interest on debt that the German government pays, Italy would be close to being in surplus. And that in a nut shell is the case for euro bonds; that is to say for all countries in the euro area to raise money by using the same bonds, backed by each and every government. You can see why Germany does not like that idea, but then again, a monetary union with one central bank controlling monetary policy, cannot really work unless governments pay the same interest on their debts.

But the data relating to German savings on its debt does not tell the full story. The fact is that German exporters, the drivers of its economy, have done well out of the euro for another reason. If Germany still had the Deutsche mark, the currency would surely have risen sharply in recent years. By sharing a currency with the likes of Greece, Germany has enjoyed a massive terms of trade benefit.

So actually, for Germany there have been plenty of upsides to being in the euro, which is why it is right that it pays for the downsides too.

© Investment & Business News 2013

Sometimes data is too good to ignore, and the latest Economics Review from the ONS contains such data. It shows that the star of the recession of 2008 was Canada. In Q1 of this year, Canadian GDP was no less than 5.1 per cent up on the pre-recession high.

US GDP was 3.2 per cent up, German GDP 1.3 per cent up, but French GDP is still 0.8 per cent below the pre-recession peak. In Japan GDP is now 1.3 per cent below peak, and for poor old Blighty, GDP is still 2.6 per cent below peak. Within the G7, Italy has suffered the worst performance, with GDP currently 8.6 per cent below peak.

Japan saw the steepest rate of decline during the recession, however, and at one point GDP was 9.2 per cent below peak before its recovery began.

So far, all is good for Canada. Just bear this mind, however. Levels of household debt in Canada seem high; they have risen since 2007, and are now even higher than in the UK and much higher than in the US. Meanwhile, Canadian house prices to both income and rent, relative to their historic average, seem excessive.

There are parallels between Canada today, and the US and the UK in 2007.

© Investment & Business News 2013

May 14 2013: put that date in your diary. For on that day in history data was released showing industrial production across the euro area rose by no less than 1 per cent in March on the month before. It was the second month in succession to see a jump in production, although in February the increase was a more modest 0.3 per cent.

Chris Williamson at Markit said: “The March rise in production was the largest since July 2011.” He added: “The data therefore bode well for GDP to show a significantly weaker decline than the 0.6 per cent contraction seen at the end of last year, and even raises the possibility of the recession having ended.”

Alas, look a little closer and the story that emerged is not quite so good. Mr Williamson put it this way: “[The rise in production] was in part buoyed by a 3.8 per cent surge in energy production. The upturn also masked worryingly strong variations within the single currency area: production surged 1.7 per cent higher in Germany but fell by 0.9 per cent and 0.8 per cent in France and Italy respectively.”

He said: “Any improvement or respite from recession looks likely to be short-lived, as the business surveys have already started signalling a renewed weakening.”

On the other hand, at least there are signs that Germany may be turning. Not only did data reveal a rise in industrial production, the latest Zew index – a measure of investors’ expectations – rose. According to Capital Economics, it is consistent with growth in the Germany economy of around 2 per cent, from just 0.4 per cent in Q4.

So there you have it, Germany is doing well but other parts of the Eurozone are not so strong. Maybe May 14th was not so unusual after all.

© Investment & Business News 2013


The inflation hawks say runaway inflation is inevitable. With record low interest rates and money printing, it is as sure as eggs are eggs.

If that is so, explain this. In the latest data out today from Eurostat, inflation in April was recorded at 1.2 per cent. That is about as alarming as one broken egg in a giant chicken farm.

The inflation rate has halved over the last year – it was 2.6 per cent in April 2012.

A breakdown of the figures is not yet available, but last month inflation in Greece was just 0.6 per cent. In Germany it was 2.0 per cent.

Truth be told, in order to compete, the countries of the southern Eurozone – that is Portugal, Spain, Italy and Greece – have to see prices fall relative to Germany.

This has already happened to an extent in Ireland. If you give the consumer price index in Germany and Ireland a reading of 100 in 2008, then by March this year the index had risen to 115 in Germany, 109.5 in Ireland. In other words, since 2008 German prices have risen by 15 per cent and by 9.5 per cent in Ireland. The economy of Ireland still has plenty of problems ahead, but it has at least partially closed the competitive gap with Germany.

The problem facing the southern Eurozone is that at a time when average inflation across the region is just 1.2 per cent, in order to close the competitive gap they may need to see even lower inflation than that – indeed outright deflation may be the ticket.

When you carry large debts, deflation is about as disastrous as you can get. Imagine the scenario. A country suffering from deflation may be growing in real terms, but in nominal terms contracting. And if nominal GDP is falling, it becomes devilishly difficult – some might say nigh on impossible – to cut debt relative to GDP.

Capital Economics reckons that as a result of deflation, there is a danger that by 2020 debt government debt in Italy and Greece may pass 200 per cent of GDP. And it could be around 170 per cent of GDP in Spain and Portugal. The very process of austerity, and the domination of hawks at the ECB, is creating low inflation across the Eurozone, which in turn may cause debts in Southern Europe to escalate to even more horrendous levels.

Capital Economics reckons there are three possible solutions: default, euro exit, or money transfers from north to south of the Eurozone – in other words, much closer political union.

Italy’s new Prime Minister Enrico Letta is pushing for the latter approach. In a speech yesterday he laid it on thick: “Our destiny as Europeans is common, otherwise it will be made up of individual countries that will slowly decline,” he said.

There is a fourth scenario, however and that is more inflation, especially wage inflation, in Germany,

EU Social Affairs Commissioner László Andor has called for wages to rise in Germany. In an interview with Süddeutsche Zeitung, he said: “Belgium and France have been complaining about German wage dumping.”

Mr Andor warned that the alternative to growth policies entailing rising wages in Germany – perhaps enforced by a rise in the minimum wage – may be mass migration.

In words that might resonate with many in the UK, he said: “Some people compare the situation to America in the 19th century, when there was a mass migration from the south to the prosperous north after the Civil War. In order to avoid this, it is necessary to create growth in the crisis countries.”

Whatever the solution, it is clear that deflation and not inflation is threatening to pulverise the southern Eurozone economy.

© Investment & Business News 2013