Core European Growth Stalls

In case you missed this yesterday.

Source: Eurostat

Euro Zone Unemployment Hits 12 Year High

The WSJ reports:

The euro zone's unemployment rate rose to its highest level for almost 12 years in April, while growth in manufacturing output slowed sharply last month as the currency bloc's sovereign-debt crisis deepened, figures showed Tuesday.

The European Union's Eurostat agency said the unemployment rate across the 16 countries that share the euro increased to 10.1% in April from 10.0% in March, the highest level since June 1998. Economists were expecting the rate to hover at 10.0%.

There were 15.9 million unemployed people across the 16 countries that share the euro in April, more than the entire populations of Austria and Ireland combined. But there are signs the jobless rate may be close to peaking after only 25,000 people joined jobless queues in April, the second-smallest increase since March 2008, Eurostat said.

Source: EuroStat

Has Euro CPI Seen Its Lows?

The AP details:

Consumer prices in the 16 countries that use the euro fell by 0.1 percent in the year to October, official figures confirmed Monday. Eurostat, the EU's statistics office, kept the rate unchanged from its preliminary estimate, in line with market expectations.

October's decline was the fifth in a row. In the year to September, prices fell by 0.3 percent. Though falling prices may be good for hard-pressed consumers, it is a sign of just how shaky demand remains.

Inflation is expected to turn positive in the months ahead as last year's sharp falls in energy prices fall out of the annual comparison and growth returns — figures last Friday confirmed that the eurozone returned to growth in the third quarter of 2009, albeit at a fairly anemic level of 0.4 percent.

Source: Eurostat

Eurozone GDP Breaks Through Zero... Concerns Still There

Bloomberg reports:

Gross domestic product in the economy of the 16 nations using the euro rose 0.4 percent from the second quarter, when it fell 0.2 percent, the European Union’s statistics office in Luxembourg said today. Economists had forecast the economy to grow 0.5 percent, according to the median of 34 estimates in a Bloomberg survey.

Europe’s economy is gathering strength after governments stepped up stimulus measures and the European Central Bank injected billions of euros into markets to encourage lending. While confidence in the economic outlook is at a 13-month high, rising unemployment, the expiration of stimulus plans and a surging euro are threatening to undermine a recovery.

“The euro-zone economy has officially turned the corner and that is cause for relief, but not celebration,” said Martin van Vliet, a senior economist at ING Bank in Amsterdam. “The economy remains in a fragile state and is recovering mainly because of government stimulus and temporary inventory effects.”

JP Morgan analyst David Mackie was similarly unimpressed (via FT Alphaville):

The third quarter GDP data suggest that the region has exited recession, but the move was hardly a decisive one. Despite a 12%ar gain in industrial production across the region, GDP managed to increase by only 1.5%ar. Clearly, there was a lot of weakness in construction and services. These data will reinforce the perceptions of the consensus: that the upswing will be lackluster and bumpy. And, they present a major challenge to our more upbeat forecast of growth over the coming year. Indeed, if GDP can only increase by 1.5%ar when IP grows at a double digit pace, the largest gain since 1984, one can only worry about the future.

As for the monster quarter from Lithuania... call it a massive dead cat bounce as year over year GDP is still down 14.3%.

Source: GDP

Eurozone Industrial Production: Strong, but Split

The Good

Interactive Investor with the details:

"Euro zone industrial orders encouragingly rose by a larger-than-expected 2.0 percent month-on-month in August, thereby achieving a fourth successive increase. The underlying improvement was highlighted by the fact that euro zone industrial orders jumped by 7.1 percent in the three months to August compared to the three months to May.

The Not So Good

"However, it should be noted that August's rise in euro zone industrial orders was highly dependent on a 3.8 percent month-on-month increase in demand for intermediate goods while there were falls in orders for consumer goods and capital goods. Furthermore, euro zone industrial orders were still down by 23.1 percent year-on-year in August.

The Worrisome

The bifurcation between the "haves" and "have nots". While overall, the Euro Area was up 2% in August, countries were more than split to the downside.

Source: EuroStat

Eurozone CPI

Finance Markets reports:

Eurostat has revealed that the CPI in the euro zone declined in August by an annual rate of 0.2% and followed the record 0.7% fall in July.

Analysts were encouraged by the slower rate of decline in consumer prices and Nick Kounis of Fortis commented: “We think that the negative impact of energy prices is starting to unwind. This process has much further to go and it is likely to push inflation back into positive territory in the final months of this year.”

“The report supports the ECB in its view that the recent period of negative annual inflation rates will prove to be a short-lived phenomenon that has no implications for monetary policy,” added Mr Kounis.

Lower energy and food prices have driven inflation down but a risk of deflation is highly unlikely according to many analysts.

Source: Eurostat

Record Drop in CPI in Eurozone

Marketwatch details:

Consumer price inflation in the 16-nation euro zone fell at a record-low annual rate of 0.7% in July, the statistics agency Eurostat reported Friday. Eurostat had previously estimated a 0.6% annual drop in July. CPI fell at an annual pace of 0.1% in June.

Source: Europe.EU

What Should a Central Bank Do When...

There is a global slowdown and the following situation exists?



More here.

Source: ECB

European Exports

Interesting analysis at Zero Hedge making the case that the Euro may have more room to go on the downside. Along with some data on the level of leverage many of these countries have built up, Tyler details the reliance Europe has exporting to the UK and US (and lack of a large exposure to China and OPEC nations), both of which are facing their own own struggles.



And the associated cliff dive...



Source: Zero Hedge

Euro Area GDP Breakdown

The WSJ reports:

The record contraction in the euro-zone economy in the fourth quarter was even sharper than initially estimated, fueling fears that it will take longer for the currency block to recover from recession, final figures showed.

Gross domestic product contracted 1.6% from the third quarter and 1.5% from a year earlier in the final three months of 2008 in the 15 countries that then used the euro, the biggest contraction by both measures since records began in 1995, the European Union's Eurostat statistics agency said. The euro zone added a 16th country, Slovakia, on Jan. 1.

"Worryingly, it is far from inconceivable that euro-zone GDP contraction was even deeper in the first quarter of 2008, given largely dire data and survey evidence," said Howard Archer, chief U.K. and European economist at IHS Global Insight.

Source: Eurostat

Last Weeks Treasury Rally that Wasn't Abroad

While Treasuries have performed admirably in dollars (as defined by iShares Barclays 7-10 Year Treasury - IEF), they have SOARED over the past 6 months in Euros due to the strengthening of dollars.

Interestingly enough, while Treasuries soared last week (in dollars), those same foreign investors lost money on their investment due to the dollar sell-off after Ben's quantitative easing announcement.

Eastern Europe at a Tipping Point

I was just about to release the following post when I saw FT's Alphaville reports Latvia has been downgraded to "junk" by S&P. Here is the background I planned to release...

The Financial Ninja details:

"Latvia’s four-party coalition government, facing the steepest economic decline in the European Union and plunging public opinion ratings, resigned after two parties called for Prime Minister Ivars Godmanis to step down.

East Europe has been battered by the global financial crisis, which is curbing demand for their exports while shutting off credit and investment. Gross domestic product in Latvia, which has had 14 governments since breaking from Soviet rule in 1991, contracted 10.5 percent in the fourth quarter. The country followed Ukraine, Serbia and Hungary in seeking international aid when it lined up 7.5 billion euros ($9.5 billion) in loans from a group led by the IMF in December."

For those in the economic blogosphere, this isn't a surprise. John Hempton at Bronte Capital posted Hookers that Cost Too Much last summer, detailing the struggles Latvia was going to face, based on (you guessed it) the price of hookers:

When travel to Latvia opened up it was eye-popping for an awful lot of British lads. Here was a country where the women were Baltic Beauties – and poor. To the London lads this was bucks party heaven. It became more so when Ryan Air put on a Friday evening flight from London to Riga. Ryan Air even tried a Riga-Shannon route to service the Irish lads. The locals even got to classifying all Brits as Ryanair sex tourists as this club review shows.

Well due the crazy exchange rate the bucks parties got too expensive. I am not going to lead your round the internet to stories about over-priced hookers – but the bucks parties are moving to Prague. The Shannon-Riga flight has been cancelled. Ryan Air has recently announced a Friday night Birmingham to Prague flight.

This was just one example showing that the Latvian currency was too strong, but it allowed John to realize Latvia (and Eastern Europe in general) had all the makings for a severe recession:

Eastern Europe is full of vulnerable currencies. Most of the countries have fixed their exchange rate to the Euro (hoping I guess for Euro membership at some stage) and have massive current account deficits.

Latvia is particularly bad. The exchange rate is pegged (as per this page from the central bank of Latvia). The current account is enormous, almost 25% of GDP. There is no doubt whatsoever this exchange rate is not sustainable. Not close.

With a currency too strong, exports get crushed, but as of now they have been unable to devalue their currency due to pressure from European banks who have made huge amounts of Euro denominated loans to these eastern European countries (hence the widening of CDS spreads). A devaluation of their currency would mean the value of the loans skyrocket in local currencies, removing almost any possibility that they will be repaid. It seems we are now at the tipping point... that point when internal pressures become too strong, which is exactly what is happening now in Latvia. Back to the Financial Ninja:

Street violence is just street violence... until it isn't. This occurs when the people finally coalesce around a new leader and a new ideal. Then they unceremoniously overturn in it's entirety the old order... with all the chaos and violence that that entails.

"The deepening economic crisis has sparked the worst street violence since independence, when hundreds rioted in Riga’s old city, smashing windows and battling police after a peaceful anti- government demonstration of about 10,000 people on Jan. 13 had dissolved."

Euro Region GDP Down 1.5%

Bloomberg reports:

Europe’s economy contracted the most in at least 13 years in the fourth quarter, compounding pressure on the European Central Bank to reduce interest rates to the lowest ever next month.

Gross domestic product in the euro region declined 1.5 percent from the previous three months, the European Union’s statistics office in Luxembourg said today. That was more than the 1.3 percent economists expected and the most since euro-area GDP records began in 1995. From a year earlier, GDP fell 1.2 percent in the fourth quarter, the only full-year drop on record.

Source: Eurostat

European Industrial Production (December)

Bloomberg reports:

European industrial production dropped the most on record in December, pointing to a deepening economic slump in the fourth quarter. Output in the euro region fell 12 percent from the year- earlier month after an 8.4 percent decline in November, the European Union’s statistics office in Luxembourg said today.

Source: Eurostat

European Labor Productivity

Absolute Return Partners (via InvestorsInsight) dives into a topic I asked for reader help (and received a bunch of great comments) not too long ago... can the Euro survive? While the article goes into much greater detail about why the European Union is /isn't in trouble, the below portion details how a single currency removes the option for the "PIGS" (Portugal, Italy, Greece, and Spain) to devalue their currency to remain productive:

Since the introduction of the euro, the PIGS have failed miserably to keep up with Germany on this measure of competitiveness. So has Ireland by the way, hence its current predicament.

EU countries outside the euro zone, such as the UK, have also lost out to Germany in recent years, but the UK has been able to play a card which is not at the disposal of the euro zone members. That card is called devaluation. Whether by design or otherwise, the UK has received a massive boost to its competitiveness in recent months as a result of the sharp fall in the value of the pound. Italy used to play this card repeatedly back in the days of the Lira. So did countries like Denmark in the dark days of the 1970s.

Spain Downgraded... Ireland to Follow?

Last week I detailed the struggles Spain is working through, specifically a tumbling housing market and frozen credit markets. Throw in Spain's dependence on the ECB to enact policy across the Eurozone and no flexibility with their currency (i.e. the Euro) and it's not surprising they were under pressure. This ultimately led to S&P's placement of Spain on negative watch and days after my post, S&P downgraded Spain to AA+ from AAA (per the Irish Times):

The cut in Spain’s rating to AA+ from AAA, a level Spain had held since late 2004, sent the euro to a session low against the dollar as investors feared Portugal and Ireland would suffer the same fate after receiving SP warnings.

As detailed on Across the Curve, the debt of "have nots" in Europe (including Spain and Ireland) continue to sell off:

Yields on Italian Spanish and Greek bonds have widened by 7 basis points, 4 basis points, and 10 basis points respectively against Germany. Irish bonds have widened by 26 basis points versus Germany.

In looking at Ireland, we see a country that like Spain depended on the financial sector and an asset bubble to fuel growth. While the Irish economy boomed through mid-2007, the money supply grew even faster, at a rate of between 15-30% annually from 2004-2007. This added fuel to the fire and created an asset bubble of mammoth proportions. According to Professor Morgan Kelly (i.e. the Irish Dr. Doom, who like the Roubini is looking smarter EVERY day):

Back in 2000, lending to construction and real estate made up only 8 per cent of Irish bank lending, much like other European countries. Now it has risen to 28 per cent. By comparison, just before the Japanese bubble burst in late 1989, construction and property development had grown to a little over 25 per cent of bank lending.

Now, we see that process in reverse. When credit ran dry, the bubbles (both housing and economic) popped. The economy, in desperate need of liquidity to help slow the unwind, has seen its money supply (in terms of M3 which literally doubled from July 2004 - August 2007), decrease year over year at a rate of more than 10%. Back to the Irish Times:

Ireland's economy will contract faster than most EU economies this year and its budget deficit will be the highest in Europe in 2010, according to new forecasts published by the European Commission. Brussels predicts Irish economic output will fall 5 per cent in 2009, unemployment will rise to 9.7 per cent and the deficit will reach 13 per cent of gross domestic product (GDP) by 2010 in the face of the world’s worst recession since the second World War.

Just to see how different the situation can be with a country that has control of their money supply, below is a chart detailing that of the UK. While the UK had its own asset / credit bubble, they had a more controlled increase in money supply (a still too high for the time 10-15% vs. Ireland's 15-30%), but importantly they have been able to increase this level to almost 20% as the economy has become in desperate need of liquidity.

Source: CSO

Help Jake Understand: Is it Possible that a Country will Leave the Eurozone?

I must admit that I am no expert in the field of International Economics (in fact I do not understand it), but I am trying to grasp some of the consequences that a single currency (either through the adaption of the Euro or a fixed exchange rate) has on a country when it limits that country's monetary policy. For all those that understand this topic much better than I, PLEASE POST AND HELP ME OUT.

Point (the case for a Eurozone breakup)

Ben Bittrolff at the Financial Ninja kicks off the discussion:

Abandoning the USD in favor of the higher yielding Euro is a dangerous trade. The risks of the Euro unraveling are growing larger by the day. Recent volatility in the foreign exchange markets should definitely raise eyebrows. In the end, the USD is still the undisputed reserve currency of the world. Spain and Italy are the most likely candidates for sovereign default.

The Short View: “If the eurozone could find a way to deal with a member country’s national default, that might confirm the euro’s status as the world’s next reserve currency. But if a solution could not be found, and a country exited, any such ambition would be over, says John Authers.”

Tuesday night, I saw an eerily similar post over at Across the Curve. Before diving in, a little background on the ERM (European Exchange Rate Mechanism) which is discussed below, via Wikipedia.

The European Exchange Rate Mechanism, ERM, was a system introduced by the European Community in March 1979, as part of the European Monetary System (EMS), to reduce exchange rate variability and achieve monetary stability in Europe, in preparation for Economic and Monetary Union and the introduction of a single currency, the euro, which took place on 1 January 1999.

In a nutshell, before the ERM (or European Monetary Union “EMU”, which in its third stage introduced the Euro as the real currency), a country controlled their own monetary policy and could devalue their currency when the situation deemed appropriate. No longer… as a result we see a growing divergence between the haves and have-nots. To Across the Curve:

Belgian 10-year spreads over Germany have widened 16 bp over the past five days in line with Spanish spreads. Dutch spreads have widened 10 bp over the same period, in line with Italy and in sharp contrast to the 2bp widening by France. On a three month basis, Belgian spreads have widened 37bp, also in line with Spain and vs. 32 bp for Holland and 21 bp for France. As we noted yesterday, part of the widening of Spanish - and also Belgian - spreads may reflect liquidity premiums but, at least for Spain, also likely reflects competition. Prior to ERM , a devaluation of the Spanish currency enabled the country to boost its competitiveness.

It appears to me that the ERM and/or the EMU has limited the ability of a country, such as Spain, to react to the specific situation occuring in their economy, as each country is forced to accept the monetary policy best suited for the union as a whole. In other words (back to Across the Curve):

ERM membership blocks / eliminates that policy action and risks a deeper economic crisis.

Spain, which is under severe economic strain, cannot respond with a devaluation of their currency and a flooding of liquidity, as they need to move forward with a policy best meant for the larger powers (i.e. Germany), which have not experienced the same home boom / bust and are still worried about reigniting inflation after all they went through in the 1930's.

In fact, just the reverse situation has occurred... the money supply in Spain (as measured by M3) has actually decreased over the past three months, just as the country is in desperate need for liquidity.



And things seem unlikely to improve anytime soon. As Forbes reports:

Restrictions on foreign financing have collapsed Spanish housing and consumer spending booms and sent unemployment to the highest rate in the European Union at 13.4 percent in November. S&P saw the risk of prolonged weak growth after the Spanish economy entered its first recession in 15 years during the fourth quarter.

Counter-Point (no breakup)

The counter-argument comes from Willem Buiter (hat tip Naked Capitalism):

Three issues are being linked in this passage. The emergence of high levels of sovereign default risk premium differentials between different eurozone member states, the external value of the euro and the likelihood of the eurozone breaking up. There is no self-evident link between these three issues. The first is neither necessary nor sufficient for the second or the third. More than that, the threat or reality of sovereign default by a eurozone member state is much more likely to reduce that country’s incentive to leave the eurozone than to increase it....

Why?

Would a eurozone national government faced either with the looming threat of default or with the reality of a default be incentivised to leave the eurozone? Consider the example of a hypothetical country called Hellas. It could not redenominate its existing stock of euro-denominated obligations in its new currency, let’s call it the New Drachma. That itself would constitute a further act of default. If the New Drachma depreciated sharply against the euro, in both nominal and real terms, following the exit of Hellas from the eurozone, the real value of the government debt-to-GDP ratio would rise.

Go read the whole thing, but to say I'm uncertain would be an understatement...

Basketball Players Shouldn't Be Currency Traders

Back on July 23rd, AJC reported that Josh Childress of the NBA's Atlanta Hawks would be playing in Europe:

Childress, 25, is the first player at this stage of his NBA career to spurn the world's most high-profile basketball stage for one of its international alternatives.

Why? According to his agent Lon Babby:

"Given the relative strength of the Euro, there are teams with the relative ability to compete with NBA teams for players. It's going to change the dynamic of the process and I'm sure some others will look at it and it could become a part of the business."

Turns out it wasn't such a hot idea...

Update: Looks like the contract was in Dollars, not Euros, thus his contract doesn't become smaller to Josh... it becomes more expensive for the European owner...

Pound Getting Pounded

Interesting write-up over at portfolio.com about the issues Britain is facing:

The deflation of the British housing bubble has only just begun. Prices, which rose at roughly double the U.S. rate over the past decade, tumbled about 10 percent from their peak in August 2007 through the middle of this summer. Inflation and unemployment are rising, and Britain is in a bear market.

Things might become worse in Britain than in the U.S. Consumers are more indebted; financial services make up an even greater portion of the economy; inflation takes a much more significant bite because the British have to import so much.

While the pound has crashed against the dollar over past week, the decline against the Euro can be tracked all the way back to last summer when the global housing downturn (and much of their problems) were revealed.

Update: more bad news for Britain...

Merrill has a British operating loss of about $29 billion that it can carry forward indefinitely for tax purposes. The newspaper calculates that at the current corporation tax rate of 28 percent, the bank will be able to offset losses against future profits, reducing its tax bill in Britain by as much as $8 billion.

Euro Area Inflation - May

Look familiar?

I will update through June (surprised to the upside at 4%) when a breakout of the detail is available.