Bailout fatigue will take on increasing political importance in Europe

By Edward Harrison On Jul 24, 2012

This is just a daily piece putting together the overriding theme I have extracted from today’s news. But I think the theme here – bailout fatigue -will be significant going forward.

I have said it in the past, but it bears repeating now in view of poor German economic data, as difficult as the austerity/bailout dance has been , it will become even more difficult in a downturn which affects Germany and other core countries. The news today was from Markit showing the German Flash PMI was below 50 again and had deteriorated further.

Business activity in the euro zone contracted for the sixth straight month in July, a closely watched survey showed, with powerhouse Germany weakening and the government in Greece now predicting an even deeper economic recession for this year.

Combined output in both manufacturing and services fell in the region’s two biggest economies, Germany and France, data company Markit Economics said after its latest composite survey of purchasing managers.

For the full euro zone, the preliminary reading of the July composite purchasing managers’ index was unchanged at 46.4, meaning output in the manufacturing and services industries shrank at the same steep pace that it did in June. A reading below 50 means a month-to-month contraction.

Despite the brief uptick in Q1, my view is that Germany has been in recession since late last year and now the full force of the downturn will begin to infect its economy.

The question is what are the political ramifications of a downturn when bailouts are being discussed. I believe the downturn makes bailouts more toxic politically in core countries, even in exchange for austerity. The Reuters article below about German resentment over euro bailouts gets at the feeling. Let’s remember as well that Germany still feels the emotionally-charged sting of post German-reunification solidarity taxes. So, to some in Germany, this feels like a constant siphoning off of money even while the structural reforms in Germany have lowered worker protections and wage gains. For the average German voter now is the time to start saying no. The following comment from the Reuters article – misguided in its understanding about the effect of defaults on German banks – stuck out as emblematic of the tone I expect to gain strength in recessionary Germany.

"I hope Greece exits the euro zone. We can’t keep supporting them. Spain, Italy and Greece should never have entered the euro zone," said a 73-year-old retired construction engineer waiting for a bus in Berlin who declined to give his name.

"Markets might suffer in the short term if Greece does leave but in the long term things would be fine in Germany. Right now only the tax payers are suffering," he said.

Taxpayers will suffer yet again when the dud assets come due from a Greek default or exit. There is no getting around all of this except by shifting the burden away from taxpayers to creditors of private institutions that are affected by their own credit to periphery institutions and governments. The credit writedowns are going to happen one way or another. No matter, bailout fatigue will increase and that means defaults sooner than later.

Germany would do well to heed the Moody’s warning shot | Fabian Lindner | Comment is free | guardian.co.uk

Moody’s warning fuels German resentment over euro bailouts | Reuters

ECB mulls Danish-style deposit charge as lending prod | Reuters

Italian cities risk 580 mln euro writedown-report | Reuters

How Finland keeps its head above eurozone crisis | Business | guardian.co.uk

Who will hold the Troika to account for asphyxiating Greece? – Telegraph Blogs

German Private-Sector Activity Slumps – WSJ.com

Germany and IMF to Refuse Greece Further Financial Aid, Reports Say – SPIEGEL ONLINE

BBC News – Spain’s euro woes: Crisis deepens

BBC News – Greek athletes strive for London as Athens legacy fades

We have entered the world of disaster economics – FT.com

Ten Italian cities at risk of bankruptcy, schools may not reopen – Telegraph