As the Euro zone Drowns, Countries prepare for Deeper Depression

August 15, 2012

Even the best banker forecasts warn about an imminent economic Depression

By LUIS MIRANDA | THE REAL AGENDA | AUGUST 15, 2012

The latest outlook issued by the European Central Bank (ECB) and the International Monetary Fund (IMF) provide a clear picture that shows how the euro area will fall into an economic depression. The question then is, how will the countries deal with the Depression and whether the banks will be more powerful or have collapsed too.

The risk of recession in the eurozone, after the economy of the region shrank by two tenths of a percent between April and June, threatens to slow the progression of the only growing component of the Spanish economy, that is the export of goods to the rest of the Euro nations. Today, more than half of Spain’s exports are sold in the Euro zone, but the threat of a deeper depression may affect what those nations buy from Spain in the coming months.

According to recent data published by the European statistical office (Eurostat), both the EU and the eurozone, whose member countries are major importers of goods manufactured by Spain, saw its economy falls 0.2% in the second quarter of the year.

The calculations of the European Central Bank (ECB) and International Monetary Fund (IMF) indicate that the recession will get worse in the euro area, as both agencies forecast a contraction of between 0.1% and 0.3 %, for the rest of 2012.

In the second quarter of 2012, the Spanish economy contracted 0.4%, according to the data advanced by the National Statistics Institute (INE), a fall that was not toned down by the positive contribution of the exports sector.

The latest data from the Spanish trade balance reflects an export growth of 3% until May, mainly by increased sales to emerging countries, although these markets still account for only a small part compared to Spanish business partners in Europe.

In fact, the primary client is still the European Union, which purchases 65% of Spanish exports, although sales to Spanish business partners remained stagnant in the first five months of the year. The euro zone receives more than half of Spanish goods, that is why the slow down of 1.1% in sales to these countries during the first five months of the year following the crisis have raised awareness about the difficult times ahead.

The economic developments in the euro countries has been mixed, with Germany so far resisting the crisis and, according to government numbers, growing by 0.3% in the second quarter, while France has not completely collapsed, but is experiencing a crippled economy. Both countries are major markets for Spain, with France buying some 17.4% of Spanish exports and Germany, the second most important partner getting 10.8%.

The best selling goods to these countries belong to sectors such as industrial technology and mechanical auxiliary industry and construction, chemicals, horticultural and fashion.

However, while the Germany has continued to increase the purchase of Spanish goods (6.5%), France has begun to cut its imports, which has resulted in a fall of 0.4% in sales to the neighboring country.

In the case of Germany it is important to mention the fact that the country is a major commercial creditor of Spain, although in the first five months the trade deficit has been shortened in half with Angela Merkel’s country. This has been the result of Spain not importing as many goods from Germany as it did previous to the crisis, for example.

The balance both the euro area and with the twenty seven EU countries is positive, since in both cases Spain sells more than it buys. However, the Spanish foreign balance with the rest of the world is in deficit, which is due to high energy costs arising from oil imports mainly, but also gas, coal and electricity.

The main creditors of Spain as far as energy is concerned are Russia and Nigeria, while the third is China, a country which buys mainly textiles from the Spanish manufacturing industry.

Meanwhile, Greece is trying to meet its commitments to investors. August 20 represented a key date, as it marked the date when the country had to pay off the  debt of 3,200 million euros in the hands of the European Central Bank. The mathematical impossibility to pay such debt, as it was explained in previous articles, obligated Greece to issue even more debt to finance the money owed to the ECB. With this, this country will continue the well known death cycle which in most cases concludes with the complete collapse of debtor nations.

Greece has now placed 4.063 million euros in treasury bills with maturities of three months at an interest rate of 4.43%, slightly above the 4.28% offered in July, as reported by the Greek Authority Management Public Debt (PDMA). The Greek government attempts to achieve a deferral of repayment of that debt or an advance of a new loan of 31,000 million from the second rescue package, which has been rejected by their European partners.

The disbursement of bailout money will be transferred only once the troika submits its report on the progress of the country and gives the approval for the new cuts for 2013 and 2014. Most buyers of the monthly auctions are Greek state banks themselves, which means that the entire financial system is in a downhill fall of self-financing in which the government issues securities to finance the maturities of bonds held by banks in the country, which, in turn, buy debt from the State to use it as proof of liquidity. Do you see the insanity here?

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Europe to experience economic contraction in 2012 and 2013

August 9, 2012

A new report issued by the European Central Bank forecasts a downward trend in growth and similar inflation.

By LUIS MIRANDA | THE REAL AGENDA | AUGUST 9, 2012

The “let’s do the same thing and expect better results” crowd is getting what they wanted in the Euro zone. The latest analysis issued by consultants hired by the ECB explains that the European economy is bound to contract n 2012 and continue on that trend in 2013. No surprises here, unless you are one who believes in banker controlled economies as supposed to market driven ones.

The results of the corporate elite’s policies that were supposed to help bankrupt nations to stay afloat, while they think of new non-solutions, crashed to the ground in Greece but that did not stop the bankers from applying the same so-called solutions in Spain, which is a more significant member of the European economy. So the story repeated itself there as well.

The experts consulted by the ECB have revised their forecasts for growth in the euro area this year and forecast a contraction of 0.3% versus the 0.2% forecast in May, which speaks against all measures adopted so far by Brussels and its accomplices in the banking power structure. The non-solution at hand that is being proposed is to once again cut in interest rates.

In the survey, the European Central Bank (ECB) held between 16 and 19 July and published today in the August monthly bulletin, experts conclude that growth will continue its downward trend for this year and next. With this review, the regulator says that the euro zone has room to lower interest rates in September.

“The results also imply that inflation expectations for 2012 and 2013 have experienced virtually no change compared with the previous survey,” the ECB said.

As for the inflation forecast in the longer term, the average remains unchanged at 2%. That is under current conditions, which are not likely to stand, as the euro region digs itself into a deeper hole by continuing their policies of further indebtedness, which will only prolong and worsen the crisis. Consequently, inflation will certainly not stay at 2%.

The ECB president Mario Draghi said last week that “the governing board of the entity discussed a possible lowering of interest rates, but decided that it is not the right time.” Some experts expect the ECB to reduce the price of money, currently at 0.75% at its September meeting. As in other occasions, the European Central Bank will wait until the last minute to act, and its actions will not be the real solutions needed to bring the euro economy back. As we have now heard the main stream media confess it, that is the goal of the banking elites: to delay the collapse as much as possible while inflicting pain to the nations that are in financial trouble, because this will assure the maximum consolidation of power and resources.

Expectations of growth of gross domestic product (GDP) by 2012 have been revised slightly downwards by 0.1 percentage points and currently stand at -0.3%. For 2013, forecasts of growth in the euro area have declined significantly, by 0.4 percentage points to 0.6%. Under current conditions, once can expect, that even with cooked numbers, Europe will have no growth at all after 2013, especially if more nations such as Italy and France need to be rescued as well.

“The main determinants of the downward revisions are stepping up fiscal consolidation measures in some countries in the euro area and the greater uncertainty surrounding the resolution of sovereign debt crises,” the report said. Also, “maintaining the downside risks to growth in GDP in the euro area, resulting primarily from an escalation of the sovereign debt crisis.” And what is the ECB or the IMF doing to solve the sovereign debt crisis? Nothing. That is the big pink elephant in the room, but the bankers are simply staring at it without proposing a single solution. This inaction stems from the same reason explained above. A slow, prolonged collapse will assure better results for the bankers.

“These risks are also mentioned a further deterioration in confidence, increased levels of uncertainty and a fall in external demand as a result of a slowing global economy,” according to the ECB. The inflation forecasts for 2012 and 2013 obtained from the survey are located at 2.3% and 1.7% respectively, implying that not been revised figures for 2012 and have been revised 0.1 percentage point decline in the 2013.

This downward revision for 2013 was primarily “to lower prices for energy and raw materials, the less favorable growth prospects and the fact that wage pressures have been more limited,” according to the ECB. He added that inflation expectations for 2014 are at 1.9%. Risks to the outlook for price developments remain generally balanced over the medium term.

Upside risks come from further increases in indirect taxes, resulting from the need for fiscal consolidation, and some increases in energy prices over the medium term plan. The main downside risks are related to the impact of lower growth than expected in the euro area, especially due to the escalation of tensions in financial markets that could affect the balance of risks to the downside.

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Spain’s Economy Slows Further and Runs out of Options, says Central Bank

July 24, 2012

REUTERS | JULY 24, 2012

Spain’s economy sank deeper into recession in the second quarter, its central bank said on Monday, as investors spooked by a funding crisis in its regions pushed the country ever closer to a full bailout.

Economic output shrank by 0.4 percent in the three months from April to June having slumped by 0.3 percent in the first quarter, the Bank of Spain said in its monthly report.

Economy Minister Luis de Guindos ruled out a full-scale financial rescue on top of the 100 billion euros already earmarked for the country’s banks, but Spain’s sovereign bond yields stayed mired in the danger zone.

In contrast to de Guindos, who told lawmakers there was little else Spain could do to ease the tensions after launching a 65-billion-euro austerity package last week, the central bank’s deputy governor said more belt-tightening was needed.

“(Current market tensions) reflect problems in Spain as well as the euro zone,” Fernando Restoy said after a conference in Madrid.

“We need to continue further along the same line. We need more cuts, more reforms which will restore market confidence and mechanisms which will strengthen the monetary union.”

Earlier, media reports suggested half a dozen regional authorities were ready to follow Valencia in seeking financial support from Madrid.

Prohibitively high refinancing costs have virtually shut all of the 17 regional governments out of international debt markets, forcing the worst hit to seek loans from the central government to meet bond redemptions.

Spain’s sovereign debt yields rose above 7.5 percent on 10-year paper on Monday, well above the 7 percent level that triggered the spiral in borrowing costs that led to bailouts for other euro zone states.

GERMANY STIRS

In a sign of a growing awareness among the euro zone’s heavy hitters of the need to protect Spain, Economy Minister De Guindos will travel to Berlin on Tuesday to meet with his German counterpart Wolfgang Schaeuble.

“We believe that the reforms already begun by Spain will help calm the markets,” Schaeuble’s spokeswoman Marianne Kothe said in Berlin, adding that the regions’ funding problems had “nothing to do with” the European rescue deal for the country’s banks.

Germany knew of no plans for a broader Spanish bailout request, she said.

Asked about that option on the sidelines of a parliamentary hearing on the bank aid, De Guindos said: “Absolutely not.”

The mounting unease was reflected in financial markets.

Spanish two-year bond yields were up almost 90 basis points at 6.64 percent and the cost of insuring Spanish debt against default rose to a record high.

With the blue-chip stock market index Ibex hitting its lowest level since 2003, Spain reintroduced a temporary ban on short selling on Monday to discourage speculative trading.

But the ban, matching a restriction imposed on Monday in Italy, stoked fears that Spain’s sovereign debt and banking crisis may be more widespread than expected, sending European shares to new intraday lows. They later recovered in Spain and Madrid stock market fell 1.1 percent on the day.

Spain slipped into recession for the second time since 2009 in the first quarter of this year, its economy crippled by a bank sector weighed down by soured assets from a collapsed property bubble and unemployment rates that have risen close to 25 percent.

The government said on Friday it expected the economy to continue to shrink well into next year, fuelling market and massive protests.

For the 12th day running, government employees demonstrated against the cuts programme in the main cities of the country on Monday, blocking roads and stopping traffic.

TIME FOR THE ECB?

In his comments to parliament, de Guindos hinted the European Central Bank – hitherto unwilling to relaunch stalled stimulus programmes that might offer relief to Spain and other states at the sharp end of the euro zone debt crisis – should now step in.

Asked whether ECB intervention was needed, De Guindos said: “I repeat that in this situation of uncertainty and excessive volatility… the only way to act goes well beyond the capacity of governments.”

There was however little sign that the Frankfurt-based institution would move any time soon and Ireland’s Prime Minister Enda Kenny warned the Spanish situation was getting very serious.

“They’re effectively locked out of the long term markets. Obviously it’s an economy with huge figures and from that point of view it’s one of a number of countries now which face very challenging positions,” Kenny told national broadcaster RTE.

Meanwhile, Spain’s central bank said an accelerated programme of structural reforms could offset the impact of the deep austerity programme, aimed at shrinking one of the highest public deficits in the euro zone.

It called for great sector liberalisation to improve competitiveness, the reduction of administrative red tape and the improvement of transparency in good and services markets.

“This should offset the negative short-term effect of the higher fiscal restrictions and, above all, will determine the economy’s medium- and long-term growth potential and productivity,” the bank said in its monthly bulletin.

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Greek Economy Getting into a Deeper Hole

April 24, 2012

By GEORGE GEORGIOPOULOS | REUTERS | APRIL 24, 2012

Greek GDP to slump 5 pct in 2012. Current account gap to shrink to 7.5 pct of GDP. Inflation seen at 1.2 pct in 2012. Strict adherence to reforms urged.

Greece’s economy will contract a deeper than expected 5 percent this year, the country’s central bank chief said on Tuesday, piling more pressure on to a citizenry already battered by crippling austerity and record joblessness.

The projection topped a previous forecast the central bank made in March, when it projected the 215 billion euro economy would contract 4.5 percent after a 6.9 percent slump in 2011.

Twice bailed-out Greece is in its fifth consecutive year of recession.

Speaking to shareholders at the central bank’s annual assembly, George Provopoulos, also a European Central Bank Governing Council member, urged strict adherence to reform and fiscal adjustment commitments Greece has agreed with its euro zone partners, saying they were needed to return the economy to sustainable growth.

Athens is under pressure to apply more fiscal austerity to shore up its finances as part of a new rescue package agreed this year with its euro zone partners and the International Monetary Fund (IMF) to avert a chaotic default.

Its continued funding under the 130 billion euro package will hinge on meeting targets.

Provopoulos warned that Greece’s euro zone membership was at stake if it failed to follow through on its pledges, especially after national elections next month.

“If following the election doubts emerge about the new government and society’s will to implement the programme, the current favourable prospects will reverse,” he said.

Greece is set to pick a new government on May 6, with the two main parties in the current coalition seen barely securing a majority in parliament, according to the latest opinion polls.

Whoever wins will have to agree additional spending cuts of 5.5 percent of GDP, or worth about 11 billion euros for 2013-2014, and gather about another 3 billion from better tax collection to keep getting aid, the IMF has said.

IMPROVING COMPETITIVENESS

The central banker projected Greece’s current account gap, a key indicator reflecting eroded economic competitiveness, would shrink to 7.5 percent of gross domestic product (GDP) this year from 9.8 percent in 2011. In March the central bank forecast the gap would drop to 7 percent of GDP this year.

“The expected drop in unit labour costs in 2012-13, coupled with the projected price trends will lead to a marked improvement in competitiveness, contributing to a rise in exports and import substitution,” he said.

Consumer inflation is seen slowing to 1.2 percent this year and may fall below 0.5 percent in 2013. Weak domestic demand combined with downward wage pressures have shrunk the country’s inflation differential with other euro zone states.

The central bank estimates that by the end of this year the economy will have regained up to three quarters of competitiveness lost during 2001-09. Greece joined the euro in 2001 and enjoyed a consumption boom on lower borrowing costs.

Provopoulos said the fiscal shortfall had come down markedly but remained high. Last year Greece shrank its budget gap by 1.2 percentage points to 9.1 percent of GDP and aims for a 6.7 percent deficit this year.

Austerity measures including income and property tax increases, a rise in value-added tax rates and cuts in wages and pensions, helped reduce the gap from 15.6 percent of GDP in 2009, when its debt crisis erupted.

“The sought attainment of primary surpluses from 2013 is now achievable,” the central banker said.

Provopoulos also said private sector bank deposits had declined by more than 70 billion euros since the end of 2009, a sum equivalent to about one third of the country’s GDP, in a blow to the banking sector’s lending capacity.

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Greece must default, dump euro

September 13, 2011

by Peter Morici
UPI
September 13, 2011

European efforts at economic integration haven’t delivered sustainable prosperity in poorer nations like Greece and Portugal. Instead, these have left Mediterranean governments teetering on bankruptcy and at the mercy of Germany and other rich states that exploit European unity to live well at the expense of their poorer brethren.

The 1992 Maastricht Treaty, which considerably harmonized product and safety regulations and methods of taxation across Europe, was supposed to remove untold barriers to growth. It didn’t, because it didn’t moderate European labor laws and social programs that discourage individual ambition and investment.

The euro, created in 1999, floats against the dollar and yen and its value reflects an average of the competitiveness of its entire membership. This leaves higher productivity economies like Germany with an undervalued currency and trade surpluses and lower productivity economies like Greece with an overvalued currency and in constant need to borrow from foreign investors.

With Maastricht and the euro, German manufactures and technology became more valuable in a more integrated European market. However, Greece, Portugal and others aren’t able to use their lower labor costs to capture assembly plants to the degree, for example, that the U.S. South attracts automotive and high-end electronics manufacturing.

Moreover, Germany and other rich states continue subtle forms of protection that discourage outsourcing even to other EU member states and this frustrates the EU single market promise to more effectively equalize employment opportunities and prosperity between the prosperous core and southern Europe.

Affluent Germany, unburdened by an obligation to share tax revenues with poorer EU states, provides generous pensions, gold-plated employment security and jobless benefits and the shortest workweek on the planet. Meanwhile, governments in Greece and other poorer EU states struggled to keep up and borrowed extensively from banks in Germany and France and other rich countries to keep up.

Now unable borrow anymore in private markets, Greece and other poorer governments are forced to seek emergency loans and concessions from richer states and private creditors. They are being compelled by Germany and others to slash government spending and social benefits, dramatically raise taxes and sell off public assets.

None of this will work, because the private sectors of these economies are so dependent on government spending to maintain employment that austerity will only cause more layoffs among both private businesses and public agencies, thrust their economies into deep recessions and significantly reduce, rather than enhance, their governments’ capacity to tax and pay interest on their debts.

Moreover, to service their restructured debts, poorer governments must pay richer governments and foreign creditors in euros and this will require their economies to accomplish significant trade surpluses by developing new export industries. This would require Germany and the rich countries to let manufacturing activities and jobs migrate south that they heretofore have blocked from moving to lower-wage economies.

With a single currency, building new export industries would require rather substantial cuts in Greek and other poorer country wages and for the Germans and others to relinquish subtle forms of protection that guarantee them higher wages and favorable trade balances.

It is doubtful Greeks are willing to let their economy sink to Third World status to perpetuate the myth of European unity. As important, the Germans too much like lecturing the world about the virtues of Teutonic thrift and efficiency to let go of mercantilism, and to let debtor nations accomplish trade surpluses and obtain the euro needed to repay their debts.

If Greece had its own currency, it would still have had to reduce government spending, increase taxes and cut wages but not by nearly as much as richer EU states and the ECB now demand because Greece could also devalue its currency against those of richer EU economies to make its exports more competitive, accelerate growth and increase debt servicing capacity.

In the end, necessity will trump pan-Europeanism. The Greeks will default on their debt and, if they are smart, eventually dump the euro.

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former chief economist at the U.S. International Trade Commission.

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