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European leaders waffle about economic growth just as even Germany sees it grind to a halt!

European leaders waffle about economic growth just as even Germany sees it grind to a halt! Mindful Money

Late last night or more accurately early this morning European Council President Van Rompuy gave a Press Conference to announce the progress at the latest European Union summit. After Mr. Van Rompuy had given us some euro waffle which seemed to involve mentioning the word growth as often as he could we got European Commission President Barosso who did the same. However in answer to a question President Barosso said this.

The idea was not to have formal decisions today…

And Mr. Van Rompuy backed it up with.

no formal plans will come (at the summit) in June either.

So those who had hoped for progress on issues such as, eurobonds, a Euro area bank deposit guarantee scheme, or a Euro area bank bailout for Spain received no support at all! You might think that at least they would agree something on Greece but the official statement merely repeated the existing official line.

I reaffirms that we want Greece to remain in the euro area while respecting its commitments

Somehow the spelling error (reaffirms and not reaffirm) seems to reinforce the general atmosphere of incompetence combined with individuals who are plainly out of their depth. As the spoof Angela Merkel twitter account put it.

Well that was a waste of an evening.


I have discussed before the reducing half-life of any goodwill from these summits and this time it seems to have gone to zero as the Euro started to fall again against the US Dollar virtually immediately. The US equity market which in terms of the S&P 500 index had earlier in the day staged quite a rally from 20 points down to 2 points up was left looking rather unsupported. As an example the Eurofirst 300 equity index is flat on the day at 972 as I type this.

Economic Growth in the Euro area

In a coincidence of timing only a few hours after the press conference we received the latest most up to date information on growth in the Euro area from the flash Purchasing Manager’s Reports for Germany and France.

Even Germany has an economy which appears to be shrinking

Let us take a look at the detail of the report.

Flash Germany Composite Output Index at 49.6 (50.5 in April), 6-month low.

As 50 is the benchmark for the index we can see that even Germany is no longer growing and is in fact contracting slightly. Added to this is uncomfortable news about the German manufacturing locomotive.

Flash Germany Manufacturing PMI at 45.0 (46.2 in April), 35-month low.

So we see that there has been a substantial reduction in Germany’s supposedly all-conquering manufacturing sector so far in May. And if we examine the 35 month low and look back to how things were then we get reminded that back in 2009 the German economy shrank by 5.1% according to Eurostat. Indeed we get a further reminder of historical parallels in this bit of analysis.

the current period of falling new orders now almost matches the length, though not the depth, of the contraction in 2008/09.

If we move over to the official German data from Destatis we see that German economic growth was 0.5% in the first quarter. Now let us examine why.

In a quarter-on-quarter comparison, positive contributions were made mainly by exports

I think if we link everything together we can see how an economy depending on export growth may have ground to a halt in the second quarter of 2012.

German IFO Business Climate Index

This fell to 106.9 in May from April’s 109.9 and if we look at the report we see this.

The Ifo Business Climate Index for industry and trade in Germany fell significantly in May. Assessments of the current business situation deteriorated clearly.

So whilst the reading is above the long-term average of 100 this index too is showing a weakening. And as historical perspectives are on my mind it is back to the levels of midsummer 2008.

Okay what about the wider Euro area?

The headline turned out to be as grim as I feared.

eurozone suffers worst downturn since mid-2009

Again a very ominous historical perspective and let us examine the situation in more detail.

Flash eurozone PMI Composite Output Index at 45.9 (46.7 in April). 35-month low...The index fell for the fourth month in a row to 45.9, down from 46.7 in April, to signal the fastest rate of decline of private sector economic activity since June 2009.

So we find that the Euro area in total looks as though it has returned to the depths of 2009 and that in this area at least, Florence and the Machine were wrong when they told us that:

The dog days are over
The dog days are done

As we look for further insight we see that if the incoming French President Monsieur Hollande actually has a growth agenda as he claims it might be best to get on with it.

The rate of decline in France accelerated to the fastest since April 2009.

So what is happening in the other Euro countries?

In the rest of the eurozone the pace of contraction remained severe, and was the fastest since June 2009.

We keep coming back to this same thought don’t we? Which is that right now things are as bad as they were at what was previously considered to be the worst point of the credit crunch. And we get this estimate of the implication of this in the current quarter.

The survey is broadly consistent with gross
domestic product falling by at least 0.5% across the
region in the second quarter, as an increasingly
steep downturn in the periphery infects both France
and Germany.

Comment and Conclusion

If the latest suveys are accurate (and in the credit crunch era they have been useful…) we see that the Euro area looks as though it may be on a trajectory back to the Dog Days of 2009. But weren't we told that monetary easing such as heading to low interest-rates and Long-term Refinancing Operations would fix things? I have argued many times on this blog that policies of the Quantitative Easing type simply do not work and that interest-rates have been reduced so far that we are in a liquidity trap type situation where monetary policy becomes ineffective and frankly at times shows signs of having negative effects.

What I fear most is that rather than accepting the evidence and admitting failure we will see a redoubling of efforts like a junkie looking for the next fix. In terms of monetary policy there are a lot of elements of junkie culture with its supporters crying for.

More, More More

From one of the biggest supporters of the effectiveness of monetary easing we even got the mood swings of a junkie as Adam Posen used The Independent and the London Evening Standard in April to declare in effect that we were saved with the favourable implications for him and his policies (you’d think he was writing his CV for a new job or something…). Yet now in May he has returned to yes we need more.

My argument since the beginning is that we need to genuinely reform our banks and deal with their debt issues before we can see any sustained recovery. Some of what we find we will not like but otherwise we are on.

The Road to Nowhere

As to Barosso and Van Rompuy with their growth agenda, where is it in today’s figures? Yet again they look like fools who disturbingly for us have a lot of influence but very little actual ability which is another theme for our times.

Sunny Days

As today’s news is grim I thought I would add a lighter tone at the end and as after a long spell of rain, rain, rain (which in my new lexicon is of course defined as a drought…) the UK is sunny and warm. Here are some suggestions for a playlist.

Here comes the sun-  The Beatles
Good Day Sunshine- The Beatles
The Sun is Shining- Bob Marley and the Wailers
Sky Electric Light Orchestra- Mr. Blue
You Are The Sunshine Of My Life- Stevie Wonder
Sunny Afternoon- The Kinks

And maybe even a link to the economy

Don’t Let The Sun Go Down On Me- Elton John

As ever all extra suggestions are welcome…

This article was written by Shaun Richards and originally published on Mindful Money under the title: European leaders waffle about economic growth just as even Germany sees it grind to a halt!

Tags: banking reform , Barosso , Euro zone Crisis , European Council , eurozone , eurozone debt , eurozone debt crisis , Extraordinary Monetary Measures , General Economics , Greece , Greek Financial Crisis , interest rates , quantitative easing , Van Rompuy
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