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Economy in Brief

EMU IP trends turn mixed…just like the rest of EMU
by Rob Brusca  October 10, 2012

Industrial output fell in August in Germany, Finland and in the UK. But for most EMU members listed in this table IP advanced. Over three months IP is up very strongly in Portugal (31.8% pace) and Greece (24.7% pace). France and Spain are each up at a strong rate as well. Ireland and Germany show increases while only Finland, Italy and the UK show declines.

Very clearly the countries that have been the weakest are showing some gains at long last. This is a trend that has been emerging over the past several months. Still, the peripheral countries are not out of the woods and still have a long way to go. German IP is only 3% below its cycle peak. Italy, Spain and Greece are about 25% below their respective cycle peaks. But the short term rise has been echoed by a recent rebound in peripheral equity markets as well. Over four weeks Greece’s stock market is up by 12.3%, Italy is up by 5.2% Portugal is up 3.2%. Meanwhile in Germany, The Netherlands, and Finland, traditional core-value EMU members, the equity markets have advanced by only 2.5%, 2.2% and 1.8%, respectively.

Still in Angela Merkel’s trip to Greece the reception was not warm. There is still a great deal of resistance to austerity but also a growing feeling that Europe will not disintegrate over this conflict. The latter development is the reason for the recent bounce in peripheral markets, but is this belief true?

There is more talk of fiscal unity as eleven euro zone countries agreed on Tuesday to press ahead with a disputed tax on financial transactions aimed at making trading bear some of the financing burden in the Zone. The ‘Tobin tax’ is now closer to being implemented over the opposition of the Britain and Sweden and others.

This follows a soak the rich theme that began in the US, migrated to France where one scheme was implemented and has seen calls for a ‘mansion tax; arise in the UK. The markets transaction tax is seen as a way to ding the financial sector for the trouble it caused. But the tax will also slowdown that sector and may slow growth along with it.

With taxes come consequences.

But for now the e-Zone is growing better than we would have expected. While the weakness seems to be migrating from the periphery into the core, the core nations of Germany and France still have pretty good three month industrial growth and solid industrial growth in the quarter-to-date.

The IMF has urged more fiscal; action on the Zone and that is a call that seems both correct and misguided at the same time. The IMF wants Europe to deepen financial and fiscal ties. Further austerity can hardly help these nations, but reform is still is greatly needed. Growth would do a lot to solve the problems in the periphery but it is not clear that those nations are competitive enough to develop and to sustain growth. But for now there is a clear rebound in IP and in equity markets from some very low levels. Yet, the kind of binding that the IMF urges on the Zone is still lacking and all European officials can say is that no one can appreciate how far they have come. Maybe it’s because outsiders appreciate how much farther they have yet to go to achieve stability

If Europe is determined to stick together and to bear and share the costs of adjustment more fiscal continuity would be desirable. But if the Greeks are to be on their own and the Spain is on its own, and so on, no sort of fiscal mixing makes sense. The German plan was for fiscal constraint (deficit to GDP ratios) and isolation, the way you might treat the outbreak of a disease. But if Europe instead were to be fiscally joined that would be a strong commitment to the beleaguered periphery and would imply and clear large transfer from the wealthier core nations. But the wealthier nations do not seem to be on board for that and yet give lip-service to EMU continuity. No wonder they want a Tobin tax.

Taxes on ‘markets’ are often thought to be taxes on no man but that is wrong, they get passed on. Moreover, the tax could cut down growth of the sector and harm the evolution of growth overall and reduce tax revenues. But Europe seems to be entering some sort of desperation stage and it still is not clear how it will play out. Its policies and pronouncements are not consistent with any singe sustainable approach. Europe is still running stop-gap policies. The ECB seems committed to stopper the financial markets fall-out but the fiscal help to enable that to work is not yet in-place...and may never be ‘in-place.’

EMU can have unity without impunity. Yet the richer countries still think the poor need to pay for their sins. The sins of the rich are hidden in their banking sector. And so as long as dodge and denial dominates the Euro-sphere we can expect to get some strange policy leanings like the move toward a Tobin Tax.

Main Euro-Area Countries and UK IP in MFG
Mo/Mo Aug
MFG Only Aug
Germany -0.4% 1.5% -0.9% 0.7% 2.5% -1.7% -1.6% 6.9%
France 1.8% 1.0% 0.3% 13.2% 5.0% -0.4% -2.6% 8.9%
Finland -0.9% 1.3% -1.9% -5.8% 2.7% -1.3% 2.4% 0.4%
Italy 1.1% -0.2% -1.1% -1.0% -1.9% -7.4% -7.2% -1.1%
Spain 1.0% 0.1% 1.7% 12.0% -0.5% -4.4% -4.0% 9.3%
Ireland 0.0% 0.8% -0.3% 2.2% 13.7% -0.6% 4.2% 5.4%
Greece 3.8% 3.6% -1.7% 24.7% 16.2% 2.7% -4.7% 24.0%
Portugal 6.8% 1.2% -0.8% 31.8% 15.3% -2.2% -0.3% 28.5%
-1.1% 3.1% -2.9% -4.1% 0.8% -1.2% -0.7% 4.9%
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