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Economy in Brief

EMU Retail Sales And The Euro-Area Prospects For Stability
by Robert Brusca February 3, 2010

EMU areas retail sales continue to disappoint. Sales edged up in December and were revised higher in earlier months, infusing the series with some good news to help paper over the month of December’s poor showing. The sequential growth rates show that the value of retail sales is increasing gradually from a -2.3% pace over 12-months to a -0.2% annual pace over six-months to a +1% pace over three-months. But motor vehicle registrations are backsliding now that the major government incentive plans have had their impact.

Both Germany and the UK, large EU area economies, are showing some stability in their respective retail sales. But there is no lift or punch from the consumer. It is good to see that the drag on growth from the consumer is being put behind it. But there is no thrust propelling growth forward.

Quite apart from economists’ estimates we can look at retail sales in EMU with a kinder gentler eye. While job growth is still being undermined and consumer confidence is still shaky, getting consumer spending to stabilize is good news. It is the sort of thing that Europe’s social welfare state is supposed to achieve in times like this.

The problem for Europe is that its rate of unemployment is structurally higher than in the US. And With consumers and businesses in Europe still concerned about future unemployment, the actual rate could creep higher still while the US rate that has ratcheted higher drops sharply (sharply by the standards of unemployment rates, that is). Already European governments are using moral suasion to try to get firms not to lay off more workers and worsen their business cycle. Europe’s social welfare system does provide it with some buffers but those buffers are also modifiers to the economy’s ability to mount recovery once an economic crisis begins to pass.

Europe still labors under many problems. I sit back and wonder how long the recent disgraceful; episode with Greece will go on. If we did not know it before, we are finding out that it not possible to have a currency union- a monetary union- without also a fiscal union as well. EMU sought to trick the laws of economics and prudence when it was formed. Perhaps that is why it adopted a fiscal criterion called the mass-trick (Maastricht). It sought to replace a true fiscal union with a set of rules that are to be ‘;binding’ in manner that is not specified. In that way Europeans could have their cake and eat it too. There would be monetary union and no need to mesh together national priorities. National autonomy could coexist with monetary union, or so they supposed. Early in the game Italy defied these rules by using asset sales to make its deficits seem to correspond with the strictures imposed by rules. Upon its entry Greece had managed to hide the extent of its indebtedness. But business cycles have a way of bringing out the truth-especially when it is a harsh truth and now Greece is out of kilter again.

We find Europe in much the same state as were banks in the financial crisis with off balance sheet liabilities that came back home to roost on their balance sheet where they never supposed to reside. Europe – and its darling, the euro- has the weight of Greece to bear. For its part Greece has set out a very tough program to get back where it needs to get. Yet, it is not clear that this plan will work or that Greece will be able to stick to it long enough to find out if it does work. If Greece’s plan fails for any reason what then? Does the EU step in to help it? If so, what precedent does that set? If not what then? Blowing Greece of out the EMU would certainly not be the end of the damage from such a move.

Maybe, short of a full fiscal union, Europe needs a to tax members to fund an adjustment facility with some draconian conditions to assure that members don’t seek to use it too often.

In any event Europe is caught in the great lie of the euro-Area. That lie says you can have a monetary union without fiscal harmony. One corollary is that fiscal separateness is exactly that; regardless of the rules meant to bind. If fiscal policies are under different national domains they will be different and in time they will drift too far apart. Without a common fiscal pool and common currency the issue of breakdowns and leakages will come to the surface and zone participants will be forced to make the hard decisions they tried to avoid when they concocted the system that doesn’t make sense: the euro zone. It could yet work out the way they laid it out, but as we can see, it probably won’t.

Euro-Area Retail Sales
  M/M Saar

Dec-09 Nov-09 Oct-09 3-Mo 6-MO 12-Mo
Zone Total Value 0.1% 0.1% 0.0% 1.0% -0.2% -2.3%
Food,Bev Tobacco -0.1% -0.1% -0.2% -1.8% -2.1% -2.1%
NonFood -0.1% -1.2% 0.4% -4.4% -1.8% -3.0%
Motor Vehicle Reg -3.0% 1.0% 0.6% -5.4% 0.1% 19.9%
NonFood Country detail: Volume
Germany Value 0.8% -1.7% 0.9% 0.0% 0.4% -2.5%
UK(EU) Volume 0.4% -0.3% 0.5% 2.5% 2.3% 2.1%
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