I am not going to say a whole lot here in this post because I have been writing non-stop about Europe of late. I just want to share the European links with you. I think what the links show is that the European paradigm is in transition from front-loaded austerity to back-loaded austerity. This is something I have remarked on at length in the past. What I would like to know is what impact this move is going to have on bond and stock prices.
There are a lot of moving parts to the story as well.
- Germany: Everyone is talking about Angela Merkel’s comments about interest rates. I don’t think the comments are that significant actually. She was trying to show she understood the arguments on both sides and that they were reasonable points of view. In my view, Merkel was not trying to pressure the ECB as I have heard it interpreted in the Spanish and British press. But on austerity, banking union and common depository guarantees, Merkel is definitely increasingly out of step with the rest of Europe. I don’t hear Finland or Slovakia or the Netherlands making policy statements on these issues. But I do hear the Germans and every time I hear something, they act like they want “less Europe, not more.” Merkel says the opposite of course but her policy positions do not support this. That is a serious problem.
- Spain: A crushing depression is forcing the Spanish government to go more for growth. It looks they are getting the green light on this from Europe. The question is what economic impact will this have and what impact on bond and stock markets. It is much too early to tell but I believe Spain will have to go through another crisis and an OMT program.
- Italy: A new government has to come together soon. If it doesn’t, then Italy could suffer in the bond and equity markets. What I do know is that Italy is predicted to meet the 3.0% Maastricht hurdle this year and that it will have a primary surplus. The rumour is that they will ask to be taken off the EU’s naughty list this spring already because of the progress they are making on this front. That would put them ahead of France and the Netherlands then and could be supportive of asset prices. I don’t have a lot more colour to add on this one.
- Greece: I am bullish on Greece because of its primary surplus. I believe it has tremendous outperformance potential because yields are so high. A recent article on sovereign bonds in EM noted that even single-B rated Rwanda was trading 4 points inside of Greece on yields. That’s crazy if you asked me. The risk of a 10-year Rwanda sovereign bond is not 430 basis points less than one from Greece. For this reason alone, you have to be bullish in terms of relative value.
- Slovenia: I see the debt profile as more Latvia than Greece, with Spain being the closest euro zone comparison. Nevertheless, markets are skittish about Slovenia and it seems likely to me that the banking system restructuring will have to occur with the help of the EU. It would be interesting, however, if this happened via an OMT style-bailout instead of the types of programs that we have seen in Europe to date. I expect monetisation to occur. The threat of ECB bond purchases is not going to be enough. They are going to have actually make some purchases. And Slovenia, along with Spain and Ireland, seems like a place where the OMT program could be employed.
- France: As the second largest euro zone economy, France should make us worry given its record high unemployment rate. Not only is the economy doing poorly, the credit decelerator from a busted housing market is going to ensure that this economic downdraft has legs. France is critical to our thinking about the balance of power in the euro zone. Under Sarkozy, France and Germany presented a united front. Now Germany has been isolated and must cobble together an unconvincing coalition of smaller countries to make it seem like large swathes of the euro zone support their policy view. The weaker France gets, the more I expect them to turn toward the periphery policy-wise. Bond contagion, though, seems like a thing of the past for France.
- Netherlands: Consumer spending in the Netherlands is weak due to the impact of the housing crash. This is going to continue in 2013. I expect the Netherlands to under-perform their economic targets and since they expect to miss the 3% hurdle, I expect them to have an even higher budget deficit. The question there is what this means in terms of EU-wide policy. I believe the events in the Netherlands and France are more significant than many other places because it is the problems in those countries, core and large economies, that will tip the balance of power away from Germany toward the policy priorities of the periphery. The more France and the Netherlands under-perform, the greater the likelihood of relaxed targets, stimulus and ECB intervention. France alone is a problem for the Germans. If the Netherlands joins in with France, it’s game over.
- Ireland: I have been hearing a lot of chatter about Ireland backsliding. I have not looked at the economic figures but this should be worrying to the supporters of austerity. Ireland is the model and if the pro-austerity case is to be made, Ireland will have to be successful. I thought the Germans understood this and were prepared to cut Ireland some slack on legacy debt obligations. But it’s not clear this is the case. Even so, I still think Ireland is in the clear.
- Portugal: They are coming to market with their own stimulus despite the crushing austerity program they are enacting. It’s hard to say what impact this will have until Portugal actually misses/makes targets. I expect the to miss targets and it is now certain they will remain in the Troika program for a number of years.
On the whole, I would be watching Slovenia first for signs of crisis. I am most bullish on Greece because I do not think things are getting worse there. I believe they are starting to improve.
PIMCO | Viewpoints – Europe’s Sovereign Debt Problem: A Call for a Clear Destination
“Without political commitment to a common fiscal destination, the long-term instability and market distortions within Europe’s capital markets are likely to intensify.
To preserve the euro, the eurozone must develop federal fiscal policies that tackle significant economic, cultural and societal differences and define a credible roadmap to achieving structural reforms, a banking union, political union and fiscal union. Historical precedents in Europe may help guide the way.”
Should Eurozone current-account surpluses be reduced? | vox
“Current-account deficits have caused problems in several Eurozone countries, but surpluses are also an issue. This column argues that surpluses are detrimental to the welfare of the population to the extent they are driven by structural weaknesses affecting demand. Addressing these issues through structural reforms, while letting wages and prices respond flexibly to market signals, would be welfare-enhancing for the surplus countries.”
Rajoy Adjusts His Therapy for Spain – WSJ.com
“Mariano Rajoy is adjusting the medicine for one of Europe’s sickest economies.
The Spanish prime minister, when he took over 16 months ago, attacked bloated budget deficits by cutting spending and raising taxes. The deficit has indeed shrunk under this treatment, yet on Friday, Mr. Rajoy’s government is expected to lay out an agenda that tilts away from austerity—putting new priority on spurring growth.
Behind the move is a continued slide in Spain’s fortunes. Its jobless rate leapt a full point Thursday, to a depression-like 27.2%, and the central bank sees the economy shrinking 1.5% this year.
On Friday, the government is expected to announce new, less-stringent deficit targets, which means it won’t have to take significant new austerity measures. In addition, it will present new “structural reforms” to deregulate industries such as telecoms and energy and to eliminate regulations imposed by regional governments.”
Euro zone sees light at end of tunnel, pitfalls remain | Reuters
“There are no calls for celebration, no desire to relax in the corridors of Brussels but some officials believe the euro zone has turned a corner, sharpening the focus on longer-term reforms and structures.”
Bundesbank takes aim at Mario Draghi’s ECB rescue plan – FT.com
“Germany’s Bundesbank has criticised the bond-buying programme designed by the European Central Bank to save the euro, questioning whether it is really necessary and suggesting it represents a great risk to taxpayers.
Bundesbank president Jens Weidmann has been public from the outset in his institution’s opposition to the Outright Monetary Transactions programme launched in September by Mario Draghi, ECB president, after pledging to do “whatever it takes” to save the euro.”
BBC News – Spain revises down its economic forecast
“Spain’s government has revised down its forecast for the Spanish economy this year, saying the level of contraction is likely to be worse than previously predicted.
Madrid now expects the economy to contract by 1.3% in 2013, compared with its earlier estimate of -0.5%.”
El Gobierno asume ya que Rajoy terminará la legislatura sin bajar el paro | Política | EL PAÍS
an concerns over structural reforms and to help spur job growth
“The EU has lost the support of two thirds of its citizens, yet its leaders won’t wake up. It’s time for a sceptics’ vision of Europe”
The New Deal for Europe: more reform, less austerity – FT.com
“The War of the Coding Error is a reminder that the economy is too vital to be left to economists”
Portugal Seeks to Streamline Public Sector – WSJ.com
“A recent court decision blocking cuts in wages and pensions for public employees in Portugal is forcing the government of one of Europe’s most fragile economies to move beyond palliative measures and try to overhaul the underlying structure of an inefficient public sector.
That process, known as the refundação, or rethinking, aims at changing business as usual in areas such as the medical sector, where specialists earn more, counting overtime, than their peers in Germany do, according to the International Monetary Fund and the Organization for Economic Cooperation and Development.”
Germany raises 2013 growth forecast to 0.5 percent: Economy ministry | Reuters
“Germany will grow by a meager 0.5 percent this year, the government said on Thursday, raising its forecast by just 0.1 percentage points as a lack of investment and weak exports continue to be a drag on Europe’s largest economy.”
Crisis for Europe as trust hits record low | World news | The Guardian
“Poll in European Union’s six biggest countries finds Euroscepticism is soaring amid bailouts and spending cuts”
Merkel speech highlights European divide – FT.com
I view Merkel as merely trying to tell a German audience why rate policy is complicated in the euro zone given the different constituencies. Was here intervention ‘unusual’? Perhaps. I believe it was benign.
“Angela Merkel underlined the gulf at the heart of the eurozone when she waded into interest-rate policy, arguing that, taken in isolation, Germany would need higher rates, in contrast to southern states that are crying out for looser monetary policy.
The German chancellor’s highly unusual intervention on Thursday, a week before many economists expect the independent European Central Bank to cut its main interest rate, highlights how the economies of the prosperous north and austerity-hit south remain far apart.”
Merkel Enters ECB Interest Rate Debate – WSJ.com
I don’t think this is the correct interpretation of Merkel’s remarks. She was more even-handed than this.
“Chancellor Angela Merkel has made a rare foray into the debate over interest rates in Europe, telling bankers on Thursday that the European Central Bank is caught between the desire of some in Germany for higher rates and the need in struggling euro-zone countries for easier credit.
Her comments reflect growing anxiety in Germany about persistently low interest rates, which are hurting savers as well as bank profits.”
Germany rejects joint EU bank deposit scheme-Merkel | Reuters
“Germany, Europe’s largest economy, fears such a scheme would leave its taxpayers footing the bill for mistakes made by banks in other euro zone countries.
Speaking in the east German city of Dresden, Merkel also reiterated her centre-right government’s view that in the future bank shareholders should also suffer losses in the event of their institutions receiving euro zone rescue funds.”
Merkel pressed to ease up on austerity – FT.com
“Angela Merkel, the German chancellor, is coming under political pressure to back an easing of spending cuts and tax rises in the eurozone’s crisis-hit periphery, as the effectiveness of austerity becomes a domestic election issue.
In the campaign for September’s parliamentary poll, Ms Merkel risks being squeezed between the centre-left Social Democrats (SPD), calling for more emphasis to be put on growth, and a new anti-euro party campaigning for the return of the Deutschemark.”
Europe’s Bonds Rally While Economies Continue to Slide – WSJ.com
“The bond markets and the economies of Europe’s struggling countries tell two very different stories this year: One is rallying; the other, sinking.
In July 2012, Italian 10-year bonds yielded more than 6%; this week they fell below 4%. Falling yields mean rising prices. The Italian economy, meanwhile, has been ugly. Gross domestic product in the fourth quarter of 2012 slid 2.8% from the same period in 2011, the sharpest quarterly fall since 2009. Italian unemployment was 11.6% in February, up from 10.6% in July. The tale is similar in Spain.”
Italy should ask for more room on deficit: OECD | Reuters
“Monti’s reform drive looks set to see Italy reduce its deficit to 2.9 percent of GDP this year and it hopes to be removed as soon as May from the list of EU countries with a deficit above 3 percent.
Countries subject to the so-called excessive deficit procedure for running above that ceiling must follow European Commission recommendations to rein in the public sector shortfall by set deadlines.”
Delaying austerity is no easy way out: ECB’s Asmussen | Reuters
“European Central Bank Executive Board member Joerg Asmussen urged governments to push on with budget consolidation and reforms, saying there are no alternatives to those measures.”
EU’s Rehn: fiscal adjustment slowing down in Europe | Reuters
“European Union countries will continue to consolidate public finances, but they can now afford to do that at a slower pace than before, because their previous efforts have won them back some market credibility, the EU’s top economic official said.”
Controversy Simmers over EU Austerity and Growth Remarks by Barroso – SPIEGEL ONLINE
“In his debate in Brussels, it’s possible that the question asked by the panel’s host momentarily injured Barroso’s pride as a Portuguese and Southern European man, and that he offered his fellow nationals the prospect of easing austerity measures in response.
According to a transcript of the think tank discussion swiftly released by the Commission in response to the media furore, panel host Matina Stevis ridiculed the Commission for not taking enough action. She accused Barroso and his fellow commissioners of limiting their work in the crisis to making sure that crisis countries obeyed the European treaties.
“It means nothing to an Athenian that you are the guardian of the Treaty,” Stevis said. “The treaty means nothing. You are to be the guardian of that citizen, of your compatriot in Lisbon.” The panel host made clear that her comments were directed at Barroso. “That is an existential moment for you, sir,” she said.
The transcript indicates that Barroso then explained in detail why contracts actually are important. The violation of them, he reminded his audience, is what led to the crisis in the first place. It was after that point that he made the statements that are now being widely interpreted as signs that Barroso is turning away from the EU’s austerity path. In Monday’s conversation, it is likely that not only Barroso’s nationality played a role in the discussion, but also that of Stevis, a Greek national who is a journalist with Dow Jones and the Wall Street Journal. After a prominent Greek blogger began tweeting about her plea on behalf of Greeks, journalist Stevis proudly tweeted back, “Hey! That was me!””
A Slovenia Q&A | FT Alphaville
“So people are wondering if Slovenia will be the next eurozone crisis focal point. I can find Slovenia on a blank map, so we’re off to a good start. But how about some background?
Stop me when this sounds familiar.”
Bundesbank chief Jens Weidmann attacks FTT – Telegraph
“The head of the German central bank or Bundesbank has warned that a planned European financial transactions tax could have unexpected negative implications for monetary policy.”
Euro may only last five years, says senior German government advisor – Telegraph
“The euro has a “limited chance of survival” and may only endure another five years, Kai Konrad, one of the German government’s closest economic advisers, has claimed.”
ECB says ditching austerity would not help euro zone | Reuters
“ECB policymakers rebuffed suggestions that Europe should ease up on austerity and said that while the central bank has room to cut interest rates, such a move would not necessarily help the economy much.”
Global Insight: Politics draws out accidental truth on austerity Europe – FT.com
“There is an old saw in US political circles that the definition of a Washington gaffe is accidentally telling the truth.
In an unscripted moment at one of the surfeit of panel debates that dominate Brussels’ daily rhythms, José Manuel Barroso this week appeared to do just that. He publicly stated what many European leaders had previously only acknowledged in private: the eurozone’s austerity-led crisis response has run smack into increasingly implacable voter outrage.”
Europe: Aging deepens debt-laden region’s economic woes | Economy | News | Financial Post
“Long after the debt crisis is over, Europe will be grappling with an even more serious problem — how to pay for growing numbers of old people.
The population of some countries is stagnant or already shrinking, notably Germany’s. That will reduce savings and potential economic growth.
The workers who remain are getting older and so are less productive. That will hold back living standards.”
“Trust in the EU has plummeted across the continent. Both southern debtors and northern creditors feel like they are victims”