Tag Archives: eurozone

Germany Fights on Two Fronts to Preserve the Eurozone

By Adriano Bosoni and Mark Fleming-Williams

The European Court of Justice announced Sept. 22 that hearings in the case against the European Central Bank’s (ECB) bond-buying scheme known as Outright Monetary Transactions (OMT) will begin Oct. 14. Though the process is likely to be lengthy, with a judgment not due until mid-2015, the ruling will have serious implications for Germany’s relationship with the rest of the eurozone. The timing could hardly be worse, coming as an anti-euro party has recently been making strides in the German political scene, steadily undermining the government’s room for maneuver.

Flash Point: Bailing Out the Rats

We have been reading about and participating in the “bailout” of European economies for years now. To understand what this means and has achieved, we begin with an examination of the term. A few definitions are (our added emphasis):

  1. Merriam-Webster Dictionary: a rescue from financial distress.
  2. Google: An act of giving financial assistance to a failing business or economy to save it from collapse.
  3. Wikipedia has a more interesting definition: A bailout is a colloquial pejorative term for giving a loan to a company or country which faces serious financial difficulty or bankruptcy. It may also be used to allow a failing entity to fail gracefully without spreading contagion. The term is maritime in origin being the act of removing water from a sinking vessel using a smaller bucket.

As can be seen from the above, the popular understanding of “bailout” is supported, that of saving or rescuing a country that is at the point of an economic collapse. The idea is that with the bailout, the country avoids the collapse and recovers its economic health. The Wikipedia definition however offers an alternate interpretation, that of allowing a “graceful” failure or collapse that minimizes damage to other parties.

Before we explain why the bailouts of the eurozone economies is destined to fail in the popular sense, we consider past IMF bailouts. There is a long tradition of the IMF’s bailing out collapsing economies due to excessive debt. The solution is two-pronged, fiscal and monetary.

Fiscal solutions involve government fiscal policies and programs that reduce spending and possibly increase revenue through taxation – austerity measures. Monetary solutions require the devaluation of the country’s currency, making exports more competitive and boosting economic growth leading to recovery. The result in past instances has been that affected countries returned to economic health in at most a few short years.

There are  however, a couple of requirements that facilitate such a turnaround. One is that the global economy be robust and expanding. This allows the effects of monetary policy to quickly gain traction through increased exports. The other is that the country’s economy be closer to the top of a business cycle than the bottom so that the economic contraction created by austerity measures does not damage the economy to the extent of creating a destructive positive feedback loop. In other words, the economy must have room to contract relative to its normal past recessions.

The problem with the current economic environment for the southern eurozone economies is that none of these conditions are met. First of all, no country has its own currency so currency devaluation is not possible and monetary policy solutions are ineffective. Second, the global economy is contracting and much of Europe is in recession or at the bottom of their business cycles, including the economies of the southern periphery. The result is austerity measures are compounding the problem of these counties and their debt rather than leading to economic growth.

But let’s examine what the bailouts to-date have achieved. The major effects have been to provide loans to countries that have been used to recapitalize their failing commercial banks and to provide money to roll over existing sovereign debt as it comes due. Little of the money has actually descended to the level of the average citizens to help alleviate their suffering. Indeed, the austerity imposed as part of the conditions for the loans has increased their suffering immeasurably.

In short, the bailout measures have done nothing to save or rescue these economies. What they have done is to facilitate the transfer of private debt onto the sovereign, allowing the debt holders – the mammoth Northern European banks, to exit their positions in the failing economies at the cost of the citizens of said economies.

To return to the Wikipedia example, the ships of state of the southern periphery are sinking. The bailouts are doing nothing to save or rescue them. The bailouts are only allowing time for commercial banks and private investors to gracefully escape their risk obligations – for the rats to leave the sinking ships.

Flash Point: Policy Mistakes Leading to the Current Crisis

Niels Jensen writing in The Absolute Return Letter September 2012: How to Unscramble an Egg, lists policy mistakes made in the last decade and a half that have contributed to our current economic crisis. We have referenced this theme in our writings, recognizing Richard Duncan’s excellent discussion in his book The Corruption of Capitalism. Briefly, Jensen’s policy mistakes are:

  1. The repeal of the Glass-Steagall Act: This allowed the unfettered multiplication of credit by the investment banks.
  2. Permitting mercantilism: This created the massive imbalances in trade and capital flows.
  3. The European Monetary Union: The flawed fiscal structure of the EU has lead to the current debt crises.
  4. Austerity misunderstood: The application of austerity at the bottom of an economic cycle has only deepened it.
  5. Ignoring pension liabilities: The failure to address structural problems.
  6. A return to the gold standard: How the gold standard contributed to the problem (read Lords of Finance by Liaquat Ahamed and Barry Eichengreen’s piece from last year called A Critique of Pure Gold).

We list the above references to capture them for a possible future article that looks at policy mistakes and the Second Great Depression.

Flash Point: PMI Blues

Continuing the decline globally of PMI data noted in June, PMI PMS, and continuing in July, PMI Update: Dark Clouds and Risk of Rain On Our Parade, we have reports of further declines for August in China, China Flash Manufacturing PMI at 9-Month Low, New Export Orders Plunge at Sharpest Rate Since March 2009, and the eurozone, Eurozone PMI Declines 7th Month; German Private Sector Output Falls at Faster Rate; New Business Declines 13th Month.

Of the eurozone, Markit’s flash August reading edged slightly downward. Markit commented: The August Markit Eurozone Flash PMI reinforces the prevailing view of the economy dropping back into recession during the third quarter of 2012. The direct implication is a continued decline in economic output or GDP, notably in manufacturing. The broader implication is a global economic slowdown that is moving into a recession.

Flash Point: Europe is fixed! Not!

We received this note from our friend JR that echoes what appears to be a common sentiment.

This is simple. If the ECB sets rate caps on long-term rates then the solvency crisis is essentially over. This would essentially be a pseudo guarantee of bond markets with the ECB’s backing. This would almost certainly bring private investors back to these markets and help fund the governments. So we eliminate the solvency crisis. That’s a HUGE first step. http://pragcap.com/europe-a-policy-proposal-with-teeth

We will argue that the solvency issue is not resolved but simply kicked down the road. That in turn opens up a rarefied space we haven’t seen commentary or speculation on yet.

PMI Update: Dark Clouds and Risk of Rain On Our Parade

In June we reported in PMI PMS that most of the eurozone had contractionary readings (below 50) with Canada showing the greatest growth. With July data coming in we update the global picture. In short, things are getting worse pointing towards a global recession if we are not already there. Specific data follows:

Is Global Trade About To Collapse? Where are Oil Prices Headed?

We received permission to reprint an interview by James Stafford of the news site Oilprice.com with Mike ‘Mish’ Shedlock. We follow Mish’s writings daily since he provides unique and insightful coverage of topics that we consider important but that no one else we know of covers consistently. James highlights the key topics of the interview:

  • Why global trade will collapse if Romney wins
  • Why investors should get out of stocks and commodities
  • Why we have been oversold on shale gas and renewable energy
  • Why oil prices will likely fall in the short-term
  • Why the Eurozone is doomed
  • Why there may soon be an oil war with China
  • How government interference is ruining the renewable energy sector
  • Why we need to get rid of fractional reserve lending

A transcript of the interview follows.

Who Leaves the Party First?

There has been a lot of speculation over the last several months as to which country would leave the eurozone and possibly the EU first. Majority opinion would probably hold Greece as the most likely candidate. Portugal is sometimes mentioned. Most recently, Spain and now Italy are being considered as good candidates. Another camp has suggested the Northern European countries leave and form a new northern currency block: the Netherlands, Germany and Austria with Finland as a tag-along.

It was then with a bit of surprise that we read from Stratfor this morning, Finland Re-Evaluates Its Eurozone Membership, that Finland is a good candidate for a voluntary departure.


Yesterday in The Service Sector in Canada, we examined how the Canadian economy is being transformed from a manufacturing-based economy into a service-based economy, a trend that we showed is impoverishing the nation. Today we discuss PMI numbers and what they mean for Canada and the global economy.

The leading gauge of economic activity is the monthly Purchasing Managers’ Index (PMI) survey put out in the US by the Institute for Supply Management. PMI indices are available for many other countries. The PMI is a diffusion index, which shows the month over month change in activity as a percentage on a scale of 0 – 100. A value of 50 is neutral meaning no change in position. A value greater than 50 on the PMI is indicative of economic growth. A value of less then 50 is indicative of contraction.

Today we have two pieces of news that indicate global economic contraction.

Tracking the Next Recession

It’s a little late in the game to start this tracking series since we have been reading recession forecasts for months. However, the equity markets are skating happily on and the mainstream media is still, after 4 years seeing green shoots.

We have added this graphic for interest (updated 20130517).

Chronologically listed, the reports are:

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