EUROZONE PMI IMPROVES, BUT IRISH SPREADS HIT RECORD HIGH
Eurozone PMI came in better than expected this morning, but the region has become a story of two economies. While the core continues to show robust growth (primarily Germany) the periphery continues to struggle:
Chris Williamson, Chief Economist at Markit said: “An improvement in the PMI for the first time in three months provides much needed reassurance that manufacturing remains an important driver of the
euro area recovery. The final manufacturing PMI data came in stronger than the earlier flash estimate,
suggesting that growth picked up at the start of the fourth quarter, boosted by rising export sales.“However, it is clear that the recovery has moved down a gear. The pace of expansion has eased markedly
from the surging near double-digit annual pace seen earlier in the year to a more modest 3%–4%.“Despite the overall improvement, national divergences will continue to raise tensions for policymaking. Although Greece was the only country to see manufacturing output decline, production continued to barely rise in the Netherlands, Ireland and Spain, contrasting with strong growth in Germany, France and Italy.”
Although equity markets rallied in Europe today the credit markets remain on edge as yields and CDS spreads continued to hit highs:
“Today’s Markit Eurozone PMI continued the trend, the 54.6 October reading well up on the 54.1 flash estimate. As usual, the core eurozone countries drove the expansion but the dichotomy between core and peripheral countries was less distinct. Spain was back above the 50 neutral mark and even Ireland was expanding again.
However, the performance of Ireland’s sovereign spreads didn’t reflect this good news. The country’s spreads hit a record wide level of 530bp today as the problems for the government piled up. The negative sentiment created by a weekend article in the Irish Independent was compounded today by two unrelated pieces of news. Allied Irish Bank (AIB) announced that it had failed to sell its UK operations, meaning that the government’s preference shares could be converted into ordinary shares. Along with a proposed rights issue, this could take the government’s share to 92% if asset sales aren’t achieved. To make matters worse for the government, one of its Fianna Fail TDs announced he was resigning his seat. This leaves Brian Cowen’s administration with a very slim majority – a delicate situation given the upcoming budget vote. And all of this in a sovereign market uneasy about the EU restructuring mechanism announced last week. The Markit iTraxx SovX Western Europe was over 160bp earlier in the day before recovering in the afternoon.”
I am still having difficulty seeing how this problem doesn’t require real resolution at some point. It’s clear that austerity is simply not working. The markets in Europe are confident that the ECB can simply bail everyone out. It’s really no different here in the states. After all, the Fed has vowed to crank the printing press up if there are any signs of economic weakness. But pure common sense tells me this situation can’t last forever. At some point structural problems need to be dealt with.
Source: Markit
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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8 Comments
As you say it has to happen. The issue is when.
I think here and there it goes like this in a loop:
Party A (neo-liberal) deregulates, steals and cheats.
Economic downturn follows. People revolt. Party B comes in power.
Party B tries to fix the economy.
It either
fails; Economic downturn follows. People revolt. Party A comes in power.
or
succeeds; There is pain; Policies unpopular. Party A comes in power.
They key is to let the others fix it, then proclaim you could have done better only if you had you chance. Short memory rules everywhere. Each EU country will revise its position during corresponding elections. The Germans will have none of it at the next elections. Then it will be over for sure.
The ECB will save the day. Don’t worry.
QE on a massive scale is just a move in the direction of no bonds, which a lot of people, including me, have been calling for, since the interest on tsy’s is a subsidy for bondholders that is operationally unnecessary. With the tsy’s on the Fed’s book, the interest goes back to the government, canceling the subsidy.
But buying toxic assets is a fiscal operation in disguise, in which the Fed (government) is taking on the bad assets of the financial sector. This is a solvency operation, rather than strictly a liquidity one. Only Congress is supposed to do fiscal.
The situation is the EZ is quite different from the US, since the EZ countries are not monetarily sovereign. If the ECB doesn’t buy their bonds, then the EZ peripheral countries have to impose draconian austerity that will not only undercut growth and increase their deficits as well as debt to GDP ratios in violation of Maastrict, but it will also result in social unrest, as it already has. The ECB can do this ad infinitum, just like the FED can since it is monetarily sovereign in the euro, but the fiscal scolds are balking. I rather doubt that the EMU can survive a continuing crisis, since Germany will perceive the “printing” of more euros as too potentially inflationary for its stomach. My bet is that Germany will be the one to pull the plug on way or another.
you are forgetting about the IMF bailout fund. Of course partially paid by the US of A.
The EZ cannot continue to live off the IMF. They either have to get their monetary union together themselves, or give it up. The problem is the asymmetry, and that is structural — built in. The other problem is the unrealistic budget constraints that the treaty imposes, along with the individual nations relinquishing monetary sovereignty resulting in their inability to address economic imbalance through their own monetary and fiscal policy. Thus they are beholden to the ECB and the technocrati in command who are overwhelmingly fiscal scolds.
who cares? Ireland will be bailed out.
Keep partying.
Bill Mitchell has a post today on the EMU from the MMT vantage here.