Euroland Economic News

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Eurozone slowdown sharper than estimated in Sept: Markit
DOW JONES NEWSWIRES OCTOBER 03, 2014 7:15PM

Activity in the eurozone's private sector slowed more sharply in September than initially estimated, an indication that the currency area's economy remains trapped in a period of low or no growth.

Data firm Markit's monthly composite purchasing managers index -- a measure of activity in the currency bloc's manufacturing and services sectors -- fell to 52.0 from 52.5 in August, and was lowered from an initial estimate of 52.3. The average PMI for the third quarter was lower than in either of the two previous periods.

European Central Bank President Mario Draghi on Thursday acknowledged that recent surveys have pointed to a "weakening in the euro area's growth momentum," but said the ECB governing council continues to expect a recovery in 2015.

However, he warned those expectations could be disappointed, noting in particular that the economy's second-quarter stagnation, and signs the third quarter wasn't much better, "could dampen confidence and, in particular, private investment."

The governing council took no new action at its meeting on Thursday, despite inflation weakening to a five-year low, signaling that it will wait to see if stimulus measures undertaken in recent months lift the eurozone's weak economy.

The surveys of 5,000 businesses across the currency area indicated that the annual rate of inflation is unlikely to quickly move back toward the central bank's target of just below 2 per cent, and may fall further below it. Manufacturers and service providers said they cut their prices again in September, and more steeply than in any month since July 2013.

"The waning of growth signaled by the PMI will apply further pressure on the ECB to broaden the scope of its planned asset purchases, to not only buy riskier asset-backed securities, but to also start purchasing government debt," said Chris Williamson, Markit's chief economist.

Mr Williamson said the PMIs for the third quarter point to growth of between 0.2 per cent and 0.3 per cent.

Mr Draghi said on Thursday that the governing council remained "unanimous in its commitment" to taking more action should the inflation outlook worsen, leaving the door open for purchases of government debt, or quantitative easing.

Private-sector activity in both Italy and France declined, in each case at a faster pace than in the previous month. By contrast, German activity picked up, although manufacturing declined while services accelerated. Spain and Ireland both recorded continued, if slower, expansions.

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http://www.cnbc.com/id/102062033?trknav=...:topnews:2

Why the oil price decline is failing to boost Europe
Stephen Sedgwick

Forget quantitative easing by the European Central Bank. Surely the precipitous oil price decline in the last couple of weeks will finally be the catalyst to give the down-trodden European economy the big boost it needs. I mean, after three years of prices north of $100 a barrel surely a big cut in the European energy bill will provide the stimulus effect that ECB President Mario Draghi could only dream of? Well, I'm afraid it appears there will be no energy-induced bonanza as, like many other peculiar aspects of the European economy, consumers will hardly see the benefits of market falls in commodities.

To recap, the likes of OPEC are only getting circa $90 per barrel for their oil nowadays compared with around $107 per barrel as recently as June this year. So you could be forgiven for thinking that if the producers are getting less bang per barrel then the consuming nations of Europe would be a major beneficiary. Well that's not quite the case it seems.


Getty Images
Yes, the big red top headlines talk of the 'a couple of pence per liter' off pump prices but the major benefits will never come our way in Europe. Why? Simple. Europe is overwhelmed by taxation, subsidy, over-capacity and green incentivization plans that have conspired make hydrocarbons a dirty and expensive source of energy.

Read MoreThe surprising impact of plunging oil prices

Europe's biggest economy, Germany, is at the heart of the issue in its noble pursuit to reduce greenhouse gases. Great ambition but stunningly expensive. By 2050 the Germans want to have 60 percent of their energy coming from renewables. This will be an impressive feat but may well seriously dent European competitiveness further.

Daniel Lacalle, Senior Portfolio Manager at Ecofin is worried. "Since the beginning of the crisis in 2008, average European power prices are up 38 percent whereas wholesale prices have actually fallen. The problem is that we don't see any of the benefits in Europe of the lower oil prices as we subsidize too many energy industries, we have oversupply and subsidies. In addition, there are so many green taxes that gasoline prices have been going up instead of down."

According to Lacalle German SMEs are now paying twice the price for energy as their U.S. counterparts.

Read MoreWhy the crude oil crush could accelerate

The oil producers are also at pains to point out that it's not their fault that pump prices are so high. OPEC has for years tried to blame governments in Europe and elsewhere for taking too large a slice of the overall price of gasoline. OPEC has a lovely chart on its website where it gleefully shows that U.K. taxes on a liter of oil equate to around 58 percent of the total cost (2013 data). In Italy the figure is around 55 percent, in Germany over 50 percent. Compare this to the U.S. where taxes account for only 14 percent.

So, yes we can all celebrate the oil price slump as a boost for many parts of the world economy, but for European industry and consumers the gains will be limited at best it appears.

- By CNBC's Steve Sedgwick

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German industrial output shrinks in August
AFP OCTOBER 07, 2014 9:30PM

Germany's unexpected weak industrial data in August has cast a shadow over the performance of Europe's biggest economy and the entire region for the rest of the year, analysts say.

Following a deep 5.7 per cent slump in factory orders as a result of the late timing of the northern summer holidays, overall industrial output shrank by a massive 4.0 per cent, according to regular data compiled by the economy ministry.

"The setback in industrial production in August was a massive one. Shutdowns in the auto industry due to the late summer holidays played an important role," said UniCredit economist Andreas Rees on Tuesday.

"We do not expect shrinking GDP (gross domestic product) in the third quarter, and hence a technical recession. However, the envisaged rebound in the third quarter is now at risk," Rees said.

The German economy shrank by 0.2 per cent in the second quarter of this year and another contraction in the third quarter would technically put the country in recession.

But the government, the German central bank and a whole range of think tanks are confident the decline will be short-lived and Germany will return to growth in the third and fourth quarters of this year.

UniCredit's Rees insisted that while the drop in both industrial orders and industrial output was severe, "there is no reason to panic".

"German industrial activity will soften in coming months as already indicated by business sentiment but not tumble into the abyss," he said.

"There is no reason to dig up the R-word again," he insisted, referring to recession.

The drop in the industrial data was largely technical rather than a sudden deterioration in fundamentals, the expert said.

But Capital Economics economist Jonathan Loynes was more pessimistic.

"August's big drop in industrial production all but confirmed that German industry is back in recession and underlined the need for both the European Central Bank and the German government to give the eurozone's biggest economy much more policy support," he said.

The ECB has cut its key interest rates to new all-time lows and has promised to embark on a range of measures to pump cash into the economy.

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Bundesbank hits out at ECB stimulus
DOW JONES NEWSWIRES OCTOBER 08, 2014 7:30AM

German Bundesbank President Jens Weidmann criticised the European Central Bank's decision to buy private-sector bonds and signalled his fierce opposition to purchasing government bonds, underscoring his reluctance to back additional stimulus measures to combat weakness in the eurozone economy.

In an interview with The Wall Street Journal, Mr Weidmann rejected calls from the International Monetary Fund and within the ECB for Germany to cut taxes or ramp up public spending despite mounting signs that its economy is succumbing to Europe's downturn. The European Commission should consider rejecting France's 2015 budget, which exceeds deficit targets mandated by the European Union, he added.

Mr Weidmann said he stands by the conservative principles that have characterised the Bundesbank throughout its nearly 60-year history: keeping inflation low; protecting the central bank's balance sheet from risks and maintaining the strict separation of monetary policy from the financial needs of governments.

His caution stands in contrast with the ECB's latest attempts to convince investors that it will act forcefully to boost the flow of money to the economy, and may raise doubts about the bank's ability to gain the consensus needed to do still more expansive steps if needed. It also exposes the deep rifts that still mar the eurozone, with countries including France and Italy calling for more flexibility while Germany insists on fiscal rigour.

"There is a risk of monetary policy, especially in the euro area, being held hostage by politics," Mr Weidmann said in an interview at the Bundesbank's headquarters in Frankfurt, just a few kilometres away from the ECB.

His remarks come on the eve of meetings in Washington, DC, of the International Monetary Fund, which will bring together finance ministers and central bankers from large and developing economies.

Mr Weidmann is one member of the ECB's 24-person governing council, which includes heads of the 18 national eurozone central banks and a six-member executive board. He can't veto ECB policies, and has been overruled by the majority in the past.

Still, Mr Weidmann's views hold considerable sway in Europe's largest economy, given the Bundesbank's role in safeguarding Germany's post-war expansion. His opposition to ECB policies makes them a harder sell to a German public that is typically sceptical of experimental central bank policies, and may hamper the ECB's efforts to show a united front.

Last week, the ECB said it would begin purchasing asset-backed securities and covered bonds in this quarter with the aim of raising its balance sheet toward levels seen in early 2012 and boost consumer prices -- a step Mr Weidmann opposed on the grounds that it may be too sweet a deal for financial institutions.

"Against the background of the announced target for the balance sheet, I see a risk that we will overpay for these assets," he said. Asset-backed securities are bundles of bank loans that are packaged and sold to investors. The ECB's shift from initiatives aimed at boosting private-sector credit toward targets for asset purchases "was debated contentiously" with the governing council, Mr Weidmann said.

On Tuesday the Dutch central bank delivered its own critique of ECB policies, warning in its semi-annual report that easy-money policies could cause financial instability and fuel asset bubbles. "The medicine should not become worse than the disease," it said.

Mr Weidmann rejected the idea that he is having it both ways by dissenting from controversial ECB decisions without offering alternatives. Most notably, Mr Weidmann was the sole dissenter two years ago when the ECB created an open-ended government bond purchase plan.

The facility -- which hasn't been used -- was credited with helping resolve the eurozone's debt crisis, though Mr Weidmann has said it blurred the line between fiscal and monetary policy.

Although he opposed the asset-backed securities program, Mr Weidmann has for months signed off on an ECB statement that officials are unanimous in their willingness to take additional unconventional stimulus measures if needed. ECB President Mario Draghi has repeatedly cited this statement as a sign of the ECB's resolve.

There is no contradiction, Mr Weidmann said. The ECB's unanimous statement "is not meant to imply a willingness to immediately fire whatever weapon happens to be in the arsenal," he said.

"I have played my part in helping to determine and fashion the ECB's array of non-standard monetary policy measures," he said, particularly the bank's lending programs. He supported rate cuts, including a negative deposit rate, in June.

Mr Weidmann said he is aware of the risks of too-low inflation. The ECB targets inflation rates just under 2 per cent over the medium term. Annual inflation was 0.3 per cent in September, a five-year low. The reading raised speculation in markets that the ECB would be forced to further increase the money supply.

However, "the trough of inflation should soon be behind us," Mr Weidmann said.

He repeated his fierce opposition to the idea of having the ECB purchase government bonds. This policy has been used aggressively by central banks in the US, UK and Japan to reduce long-term interest rates. The ECB has largely resisted this step, though officials say it is an option.

Although buying bonds in financial markets isn't forbidden, "the ECB's mandate is more narrowly limited than that of central banks in other currency areas," Mr Weidmann said, referring to rules preventing the ECB from financing governments.

"These concerns are particularly acute whenever the central bank buys specifically the most risky sovereign bonds," he said. Besides, with government and corporate borrowing costs already super low, such a policy would have limited effect. Tying fiscal policies together through ECB bond purchases "is a dangerous path," he said.

Governments also shouldn't assume that the recent weakening of the euro -- which raises import prices -- will restore competitiveness in the eurozone without structural reforms.

He was similarly skeptical of fiscal stimulus, despite low government borrowing costs. Germany's economy "is still in good shape" with factories running near capacity and employment growing, he said, even after a contraction in second quarter output and, more recently, weak manufacturing figures.

"The cyclical situation and outlook do not require fiscal stimulus" in Germany, he said.

That warning extended to France. The European Commission is considering rejecting France's budget, The Wall Street Journal reported Sunday, citing European officials, a move Mr Weidmann said he would support. "France, as the second largest euro-area country, is decisive and needs to serve as a role model," he said.

French government officials say Brussels can't reject outright the French budget and it is the national parliament that decides. The government also expects that it will be able to convince the commission that Europe must change doctrine away from austerity to growth friendly policies, French Prime Minister Manuel Valls said Monday.

More broadly, Mr Weidmann said the Bundesbank's hard-money, conservative philosophy remains relevant despite repeated financial crises in recent years that forced central banks around the world to experiment with new policies such as asset purchases.

"The concept of an independent central bank clearly focused on price stability is neither old-fashioned nor outdated," he said. "It is about not falling into the trap of 'This time is different.'"

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IMF warns of eurozone recession, presses Germany to spend more
AFP OCTOBER 10, 2014 9:11AM

THE International Monetary Fund has stepped up its warnings over a possible eurozone recession, pressing governments like Germany to spend more to reverse a stall.

Worries about the eurozone stagnating were at the forefront as the annual IMF-World Bank meetings on the global economy kicked off overnight.

Despite the general recovery from the financial crisis that began six years ago, red flags were out for a number of dangers — the West African Ebola epidemic, the Ukraine crisis, the conflict in the Middle East, and the potential global whiplash from the coming policy tightening by the US Federal Reserve.

IMF managing director Christine Lagarde pointedly warned that the eurozone could fall back into recession if action was not taken to prevent it.

“We are not suggesting that the zone is heading toward recession, but we are saying that there is a serious risk that that happens if nothing is done,” she said.

Lagarde said that the IMF put the chance of the euro area slipping back to a prolonged contraction at 35-40 per cent -- “not insignificant,” she added.

“If the right policies are decided, if both surplus and deficit countries do what they have to do, it is avoidable.”

Ms Lagarde emphasised that world economic growth overall was a firm 3.3 per cent this year, and could speed up to 3.8 per cent in 2015.

But she called that “mediocre”, and while much better than just a few years ago, what it meant for people in many countries could be flat incomes and not enough job generation to lower high rates of unemployment.

Moreover, a number of emerging economies face deeper malaise, and the huge eurozone economy was especially worrisome.

“The main subject is that of growth, globally, but the principal focus here is the question of European growth,” said French Finance Minister Michel Sapin.

The issue was what tools were available to avoid “what is described as a risk of recession,” he said.

The IMF earlier this week cut its baseline forecast for growth in the 18-nation euro area to 0.8 per cent this year and 1.3 per cent next year. But with deflation a growing threat and demand and industrial output falling even in eurozone powerhouse Germany, a worse outcome is possible.

Ms Lagarde said only a “very modest part” of the European slowdown could be blamed on the Ukraine crisis and the economic sanctions western Europe and the United States had placed on Russia.

If the eurozone continued to stall, IMF chief economist Olivier Blanchard warned on Tuesday, “it would be the major issue confronting the world economy.”

The IMF and World Bank are pressing governments to push reforms that will boost growth, and to target more spending on job-creating activities like infrastructure development.

That pressure in the eurozone focused on Germany, the region’s powerhouse, to agree to power up growth and prevent a slide back into recession.

Germany “could afford to finance much-needed public investment in infrastructure primarily for maintenance and modernisation, without violating fiscal rules,” the IMF wrote in its new report on the global economy this week.

Speaking in Washington, however, German Finance Minister Wolfgang Schaeuble denied his country was contracting, and stuck to his opposition to higher spending to revive the eurozone.

More growth would not be “achieved by writing checks,” he said. Instead, he insisted that Italy and France — both of which want to boost stimulus spending — implement “essential structural reforms”, and he cautioned against a further loosening of monetary policy by the European Central Bank.

“You can’t always spend other people’s money in a monetary union,” he said.

But he appeared to leave some room to bend Germany’s tough stance. “We are the engine of growth in the eurozone,” Mr Schaeuble added. “We have to give more priority to investment.”

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Merkel: Germany in good shape overall
DOW JONES NEWSWIRES OCTOBER 11, 2014 4:15AM

German Chancellor Angela Merkel has made a case against doomsayers of the country's economy, saying overall conditions are good despite geopolitical crises that have hurt exporters.

The comments come amid recent disappointing economic data, including a 5.8 per cent drop in exports in August from the previous month and a sharp decline in manufacturing orders and industrial production.

"Of course, the geopolitical crises don't leave export-orientated German companies unaffected," Ms Merkel said at the German-Chinese Forum for Economic and Technological Cooperation. "But the overall German economy is in a good shape. We have strong domestic demand, which is also a contribution to growth of the global economy. The persisting high level of Germany's consumption benefits from stable prices and a stable employment situation."

Still, the crises in Ukraine and elsewhere plus weaker demand from eurozone economies for German goods have hurt German exports. This prompted the International Monetary Fund and the country's leading economic research institutes to cut their growth forecasts for Germany earlier this week. The government is due to present its autumn outlook report on Tuesday. Senior officials have said they would lower the existing forecasts for 1.8 per cent growth for this year and 2.0 per cent for next year that were given earlier in the year.

Speaking at the business conference that was also attended by Chinese Prime Minister Li Keqiang, Ms Merkel stressed the close business ties between both countries that saw a trading volume of over EUR140 billion ($203 billion) last year. Germany, which is China's largest trading partner in Europe, saw its exports to China nearly doubling since 2008 to nearly EUR67 billion, Ms Merkel said.

Ms. Merkel said she agrees with Mr Li "that we must reduce as much as possible existing public hurdles for trade and innovation."

In this context, she called for the same treatment, fair competition and legal security for German companies in China.

"I want to call on Chinese companies and investors to take Germany as an attractive investment location closer to their hearts," said Ms Merkel. "They are very much welcome here."

Mr Li described the relations between German and China as that of a "common destiny."

"We depend upon each other," Mr Li said.

He said the two-digit growth of the two countries' trading volume during the first three quarters of this year, which came despite a weakening of the global economy, highlights the intensive cooperation and integration of both economies.

Earlier on Friday, Germany and China agreed on closer business ties, with companies from both countries signing 30 agreements with a multibillion euro business volume.

The deals include an agreement that will have Volkswagen extend the cooperation contract with its Chinese partner FAW Group by 25 years, and an agreement between Airbus Group and China to set up an A330 completion center there.

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Eurozone 'likely to resume recovery'
DOW JONES NEWSWIRES OCTOBER 11, 2014 6:30AM

The European Central Bank will make certain its stimulus measures are large enough to ensure that inflation gets back to its goal of just below 2 per cent, ECB executive board member Peter Praet said Friday.

In prepared remarks to a conference organized by the Institute of International Finance, Mr Praet said the eurozone economy likely resumed expansion in the third quarter after stalling during the second quarter.

But the recovery is likely to be modest, said Mr Praet, who also serves as the ECB's chief economist.

"Geopolitical tensions remain severe and the growth drivers appear rather anemic, with macroeconomic adjustments, high unemployment and sluggish investment behavior acting as a drag on economic dynamism," he said.

In addition, sluggish wage growth "casts doubt" on expectations that inflation will gradually pick up, he said, "and the volatility we have seen recently in medium- to longer-term inflation expectations is a cause for extra vigilance."

Against the economic backdrop--and with annual inflation at 0.3 per cent in September, far below the ECB's objective, the ECB launched a pair of easing packages in June and September that included interest-rate cuts to record lows, a new four-year bank lending program and programs to purchase asset-backed securities and covered bonds.

The lending and purchase programs, he said, should have a "sizeable" impact on the ECB's balance sheet. The balance sheet--which includes the central bank's loans to banks and other assets it holds--has declined by roughly 1 trillion euros since 2012, when banks started making early repayments under separate three-year loan facility.

ECB President Mario Draghi has said the aim is to get the balance-sheet closer to levels seen at the beginning of 2012, though he hasn't specified an amount.

"It should thus be clear that the balance sheet communication does not establish an additional target for monetary policy," Mr Praet said. "Instead, in assessing the ECB's monetary policy measures, the primary metric of success remains their impact on inflation rather than on the balance sheet."

Mr Praet repeated recent comments from ECB officials that the central bank is prepared to take additional unconventional measures if needed to meet its inflation target.

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US medicine won’t cure Europe’s ills
BUSINESS SPECTATOR OCTOBER 14, 2014 12:00AM

Alan Kohler

Business Spectator Columnist
Melbourne
THE sudden disappearance of the European Central Bank’s credibility is potentially the most shattering global financial event since September 2008.

In New York last Thursday, ECB President Mario Draghi said: “Let me be clear: we are accountable to the European people for delivering price stability, which today means lifting inflation from its excessively low level. And we will do exactly that.”

He wasn’t believed; in fact he was all but ridiculed.

The German 10-year bond rate promptly crashed to the stunning level of 0.812 — the lowest long-term European interest rate since the deflation of 15th century Genoa. Five-year inflation expectations as measured by the five-year forward swap rate crashed to below 1.8 per cent. Equity markets had their worst week of the year, with wild swings on all major markets.

Markets now believe Europe is headed for a Japan-style deflation trap and fear that the ECB is incapable of doing anything about it.

In June 2012, when Mario Draghi declared the ECB would do “whatever it takes”, he was referring to the crisis in the periphery, with Italian and Spanish bond yields spiralling upwards out of control.

“Super Mario” as some called him then, engineered the start of a powerful two-year global bull market with that speech, especially when he said: “And believe me, it will be enough.” Investors pinned their ears back.

At the time, markets had feared that Italy or Spain would default, breaking up the eurozone and causing a dominoes collapse of the European banking system.

It turned out to be a liquidity crisis that could be ended fairly simply by the ECB promising to supply cash, and with the threat of a European collapse off the table, the markets were able to focus on the recovery in the United States, which then allowed rising US earnings to be fully valued on Wall Street.

The new European crisis is entirely different: it’s not just the periphery but the core that’s in trouble as well. Germany’s economy has stalled and the euro area as a whole is on the brink of a triple-dip recession.

Over the weekend, the IMF told European countries to spend more on infrastructure and to reform their economies, which only served to highlight the policy confusion that now grips Europe, and the world for that matter.

Fiscal balance is still pursued in many countries, especially Germany, and including Australia, even though most of the developed world is in a liquidity trap with central banks at zero lower bound interest rates.

America’s quantitative easing programs, three of them since 2009, are held up as the saviour policy that the ECB must now pursue, but in fact it seems likely that the main factors behind the United States’ (relatively weak) recovery have been low wages and cheap energy.

More than 80 per cent of the money that the Federal Reserve created has ended up as excess bank reserves. Even though the monetary base has grown by 367 per cent over the past six years, the velocity of the money base (GDP divided by money supply) has collapsed from 17 in 2007 to 4.4.

That’s even lower than during the Great Depression of the 1930s, and it’s what Keynes referred to as a “liquidity trap”, when extra money from the central bank is held onto rather than spent, so that monetary policy doesn’t work.

And it’s clear from the fact that US inflation has fallen to 1.7 per cent even as money supply has expanded at such a quick pace, that money itself does not create inflation.

This has come as a massive shock to markets, which had been raising inflation expectations up to the start of this year, with the bears predicting hyperinflation. The US 10-year bond yield got to 3 per cent from a low of 1.5 per cent in 2012 and has now fallen back to 2.28 per cent. European yields have fallen even more than that.

Inflation, it turns out, is actually caused by a capacity constraint — usually labour, but often energy (the 1970s oil shock) or infrastructure, land or food. Growth in money supply can lead to supply constraints, but only if the money is spent.

So QE is not a panacea for European deflation. Markets understand this now and do not believe Mario Draghi can achieve 2 per cent inflation in Europe by printing money, even if Germany allowed him to do it — which is not certain either, in the Byzantine world of European politics.

The problems in Europe run deep, as they did in Japan in the 1990s and 2000s.

In many ways those problems are similar, a political inability to deal with insolvent banks and the demographic deficit caused by population ageing.

Japan eventually produced Shinzo Abe, who managed to cut through with his “three arrows” -- monetary expansion, fiscal spending and structural reform.

So far Europe has nothing but the promise of the first of those, let alone the actual implementation.

Don’t forget it took Japan 23 years of deflation to get Abenomics.

Business Spectator

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Note that the Monti government said three years ago that Italy’s debt ratio would end 2014 at 115pc. In fact it reached 135.6pc of GDP in the first quarter this year, soaring at a rate of 5pc of GDP each year, despite a series of austerity packages, and a primary budget surplus of 2.5pc.


The great Lira revolt has begun in Italy
http://www.telegraph.co.uk/finance/econo...Italy.html

[lilvestor]

Note that the Monti government said three years ago that Italy’s debt ratio would end 2014 at 115pc. In fact it reached 135.6pc of GDP in the first quarter this year, soaring at a rate of 5pc of GDP each year, despite a series of austerity packages, and a primary budget surplus of 2.5pc.


The great Lira revolt has begun in Italy
http://www.telegraph.co.uk/finance/econo...Italy.html

Only a matter of time before the euro crisis flares up again, there are deep structural problems within the EU, and they have only made it worse with a common currency.

Germany has repeatedly said that they oppose any unconditional govt debt buying program (QE) by the ECB because its debt monetization, investors in these heavily indebted countries ought to wake up now, nobody is going to buy their overpriced Italian 10 yr bonds at 2.33% yield, not the ECB at least.