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Economy in Brief

EMU MFG Continues to Slip - As Does All of EMU
by Robert Brusca  November 3, 2011

New Day! (same old problems and options) - Under a new Central bank head, Mario Draghi, the ECB has just voted to cut its key lending rate by 0.25%. While no panacea, it is a long awaited move and it comes amid political and economic chaos sparked but Greece’s move to have a referendum on the EMU package or on EMU membership or both. At the same time EMU growth has been steadily undermined day by day and virtually all key economic statistics have been eroding.

EMU MFG PMI drops - The drop in the October Markit PMI index for Manufacturing is just one of the latest pieces in that fraying puzzle.

What do the PMIs tell us? - The EMU PMI readings are probably weaker than what you realize. According to PMI jargon anything above 50 indicates an increase in MFG and anything below signals a decline. With the headline at 47.09 a decline in MFG for the EMU region is the operative signal. And the index itself sits at the 53rd percentile of its high/low range. None of that seems so bad does it? Those metrics mean that the reading is still above its high/low range midpoint but that is very misleading. The high/low percentile places the current reading in a position using only three points the historic high, the historic low and the current reading.

We prefer the queue percentile or ranked percentile reading. And they are far less up-beat.

EMU in better context - Viewing the EMU reading in is queue of historic values we find that it is in the 10.6th percentile of its historic queue. That means that it is lower than this about 10% of the time and higher about 90% of the time. That is a more accurate and chilling context. That metric makes use of every single historic observation of the PMI index. These MFG PMI readings are extremely weak.

Country standings - Germany, the historically strong county, is now posting a reading that is nearly increasing at a raw diffusion reading of 49.15. But in queue terms the German reading is weaker than this only 24% of the time. It is stronger three-quarters of the time. And this is the historic European ‘strong economy.’ Actually Ireland has the strongest queue percentile reading in the 34th percentile of its range at a raw reading of 50.11. In the EU the UK is slightly better with a raw reading of 47.42 but a percentile queue standing of 41.7. The UK is a rare economy with its percentile high-low and percentile queue readings close in value this month.

Curious Europe - We find Europe to be a curious circumstance. And after all the work that economists have done to try to unite Europe this is truly a humbling moment. Although to me the humbling is much more to be directed to the politicians that took some perfectly good economic ideas (Free trade area, common market, common currency, optimal currency area) and failed to be good caretakers for them.

Economic abuse!! - Politicians always abuse economics. And economic laws are not as final as, say, the laws of physics. You might be willing to bet that a nation’s debt to GDP ratio can rise above 100% and that the economy will ‘survive,’ but you would not jump out of a 30 story-high window and defy the law of gravity. No, gravity is just too dependable for that bet. But in economics many of the metrics economists put forth can be violated without such an immediate and catastrophic result. Yet, that does not make economists wrong. It makes politicians wrong for failing to heed good advice. It makes economists wrong for not arguing more loudly when these breaches occur and when economic judgment is stretched. It make economists wrong when the shave economic fact to join a political movement.

No one listened or even noticed - EMU allowed its Southern members to become and to remain high inflation epicenters even as they were corseted by the single currency into a single unit of account. As Greece and Spain and Portugal, Italy (to a lesser extent) and Belgium (to lesser extent) and Luxembourg ran consistently high inflation rates in the Zone, no one worried, no one spoke out, and no one took action. Therefore all are to blame.

Shame on all of them...

Abject failure of...something - The result of that is to have maneuvered many counties into a single zone, then having abandoned them to their own ways, allowed great competitiveness divides to open up within Europe. Where were the policymakers? Where were the Germans then? Why did German and French banks continue to lend in high inflation areas as these competiveness pressures got worse? As countries ran decade-long current account deficits? Was this an abject failure of economics or of politics?

Creeping crud - It did not happen overnight and Greece could not have gotten there without a lot of help in the form of financing from other regions. But Greece does not stand alone in this predicament, yet the current spot light is on Greece. There are several other EMU members that have many of the same problems and issues as Greece. And contagion is the real fear that stalks Europe.

Initially bold and noble now defunct? - What we see as Greece’s problems have gotten worse is the fact of European disintegration. Europeans were willing to talk the talk of a single Europe but were never really willing to walk the walk. The single currency seemed to be a powerful statement and it was or might have been had Euro-members acted in a way to enforce and cement the durability of that choice. But by running persistently disparate inflation rates they have been undermining their own initial, bold, noble experiment from the very start. What was bold was to think that Germany and Greece and Spain and Portugal and others could really run fiscal policies to share the same currency on a consistent basis. History had told us that the Southern European counties will always show less discipline and will always devalue Vs the DM and its closest cousin currencies in time. Now even without a deutschemark (DM) to devalue against it still remains true and that may be the preferred medicine.

The Europeans and the Euro-peons - The Europeans have been ‘European’ in name only. They have been a house divided with strong currency/low inflation members looking down upon the rest. The economic fracturing has let out the pent up feelings of inadequacy and memories of past transgressions. The Greeks assail the Germans for the gold loan German occupiers forced from Greece when it invaded Greece during the war – a ‘loan’ it has never paid back.; a sum that could be work out to be 60-90 billion pounds sterling. That could go a long way to bailing Greece out but Greece would still have its competiveness problems and a great need to restructure. But with the hardline foisted on Greece from France and Germany, Greece has taken to sticking up for itself and to opening old wounds to fight back back. Europe missed its chance to have a single Europe. It needed to consolidate fiscal accounts because it could not have such different life styles in Germany and in the Mediterranean regions and expect to remain as one.

Chaos! - Now we find Europe is in a state of chaos with poor choices all around and substantial pressures. If Greece breaks out of EMU and defaults on its debt and pays a lesser percentage to banks (and even others!!!) than 50% then launches a new currency it will have done a swift end run around austerity. It will have some difficult moments but it might find that it would fare better in such an arrangement than it would if it tried to stay in the Zone. In the Zone, Greece faces years upon years of austerity. That is what it will sign on for if it stays in EMU with its accumulated price disadvantage.

Greek referendum sounds good to me - So, to me it is right that there would be a referendum put to the people about EMU. EMU leaders have for a long time tried to avoid putting EMU/EU issues to the test of its electorate since ‘the people’ it seems do not know what is good for them.’ But Democracy is about making choices and living with them even if they are the wrong ones. The last thing we want ‘political leaders’ to do is to take us places that citizens do not want to go. The line between ‘we are to stay in EMU’ and ‘you will shut up and do as you are told’ (dictatorship) can be a thin one.

Is Europe now closer to a true union or farther away? Greece’s situation is an opportunity for a real debate on what Europe is and on what it wants to become and on what are the REAL costs of membership. It is a reminder to be careful about the wishes you make because you cannot wish your way to your financial destination; to arrive at a destination you need to make choices, and choices have consequences. Nations need to see the schematic branch diagram of choices and where they lead from the start. Instead, in Europe, they swept the hard choices under the rug and presented the “Mass-Trick’ agreement, a girdle without laces, to corset fiscal policy. And a mass-trick it was…. Ironically, I think that we are now closer to getting a real united Europe than before. This is because until Europe makes sacrifices and choices for a real future we cannot be assured by its pretend choices that gloss over real differences. A lesser European union might be greater if it is stronger and built on clearer sustainable principles even if it is smaller. ‘Smaller’ can grow to ‘Bigger.’. But ‘Too Big That Fails’ may never be able to make a comeback.

If wishes were horses the Greeks would not build Trojans ones - Helmut Kohl’s vision of the largest union possible was a noble experiment engineered by a great leader in Europe’s strongest economy. Kohl should be applauded for trying even if he failed. In the end success in that experiment required that Europeans hammer out more compromise than they were willing to abide. And tying the currencies did not lead to the discourse that was required to produce sustainable and sympathetic fiscal results. In the end Germans did not want to become Greeks and Greeks did not want to become German –even financially. Greeks wanted to remain Greek with an ability to borrow money like Germans. And for a while they were granted that wish. But they would have been better off if they never found that lamp, never rubbed it, and never were granted that wish. For that wish – among others- is what has brought us to where we are today. Wishes are not horses and there is a good reason for that. If you live in a city feeding exercising and ‘cleaning up’ after a hose is a lot of work. In the end no one in Europe was willing to care for or clean up after its wish-horse. Now it may have to be put down.

Markit MFG Indices
  Oct-11 Sept-11 Aug-11 3Mo 6Mo 12Mo %-ile Queue %
Euro-13 47.09 48.51 48.99 48.20 50.27 53.82 53.2% 10.6%
Germany 49.15 50.34 50.86 50.12 52.45 56.64 55.9% 24.2%
France 48.51 48.16 49.11 48.59 50.62 53.52 46.9% 17.4%
Italy 43.34 48.33 46.97 46.21 48.58 52.13 35.8% 4.5%
Spain 43.94 43.74 45.32 44.33 45.69 48.50 53.9% 9.8%
Austria 48.03 48.72 50.10 48.95 51.04 54.91 51.8% 13.6%
Greece 40.47 43.23 43.33 42.34 43.70 43.91 12.9% -0.8%
Ireland 50.11 47.26 49.71 49.03 49.49 52.04 72.1% 34.1%
Netherlands 48.00 48.93 50.67 49.20 51.02 54.64 49.7% 19.7%
UK 47.42 47.42 49.39 49.20 50.08 54.02 47.4% 41.7%
Percentile is over range since March 2000
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