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Economy in Brief

EMU Services Weaken but are Revised Slightly Higher
by Robert Brusca  March 5, 2013

The table and the chart report some of the same data and reveal the same trends but in different ways. EMU is a bifurcated conundrum. Germany's service sector is surging higher this time all by itself like a biker distancing himself from the peloton. France is not tagging along as it did in 2009 and 2010. No, France and Italy are holding to very low readings and the EMU reading representing the overall zone is showing some life...but mostly because of the large weight in the weighted average that is accorded to Germany in the formation of the Zone's own index.

The data in the table are telling the same story and are quite astonishing in their own way.

The German services reading sits in the 70th percentile of its historic queue, meaning it is higher only about 30% of the time. That is a very solid reading.

But in France the index is weaker only about 3% of the time, in Italy it is weaker about 8% of the time and in Spain it is weaker about 20% of the time. These are the three next largest EMU economies. Among those that report service sector data Ireland has the next best standing in the 48th percentile of its historic queue. Germany is so far out ahead that, if it were a cycling race, the race would be all-but-over and we'd be looking to test Germany for drug abuse at the race-end.

But the 'drug' that Germany has 'abused' is called competitiveness. And because it has more of it than any other European economy it is doing better than anyone else. So in the end Europe is a sort of Three-little pigs story brought to life. Only Germany built its house with bricks. But unlike in the fairy tale when the big bad wolf came around and blew the other houses down, the Germans did not provide shelter for everyone. They have let the rest of Europe brave the cold, houseless, while throwing them only scraps for survival-scraps - with IOUs attached.

Services are not really directly competitive across nations. Only in few episodic instances are services really tradable. There are transportation services and international legal services, royalties etc. But the run of the mill dry cleaning services, table service by a waiter, lawn-cutting service, plumbing, etc., are purely domestic affairs. That Germany's service sector has not collapsed along with services in the rest of EMU is a testament to how well the rest of the economy has held up. Of course, Germany's unemployment rate is closer to 5% and in EMU its closer to 12%. That is a good part of it. We see in comparing consumer confidence indicators across the Zone the same sort of ordering and stratification as we see for the comparisons among the various service sector metrics.

Germany has spurted to the lead and it has no coat-tails.

This is another telling aspect of the Zone. In an integrated region we would not expect that. We would expect Germany's pull to exert some tug on its closest trading partners. But Germany's transmission effects appear to be muted. The adjacent countries to Germany that are doing well are those that have adopted the most German-like policies, such as Austria. But, in addition to Austria, Germany abuts Denmark, the Netherlands, Belgium and France, to name a few. The Service sectors in France and the Netherlands are especially weak in comparison with historic norms. We confirm this if we go back and make comparison using the EU commission overall indices which are rather widely available.

All this begs -pleads- the question of what is the Zone? What good is it? For whom is it good?

We can ask what attributes of a single coherent linked zone that would serve all of its members' needs are missing? What we find is that the strong countries do not seem to be helping the weak very much. Multiplier effects do not emanate from the strong. The Zone does not even exhibit the derided principle of 'trickle-down!' Europe seems to provide a stable market for its large competitive members. It allows its poorer members whatever leash its larger members' banks permit. When they tire of a longer leash the less competitive are abruptly pulled back. We can conclude that Europe has a master-class set of economies and an under-class. Europe seems to be more like a Japanese lunch box with the goings on in one cell completely shielded from the one next door. Or, it's a Robert Frost poem gone amok (Good Fences Make Good Neighbors). Commerce does not appear to easily flow across national boundaries. Certainly language is one factor. Culture may be another. Travel across national lines is free but the flow commerce, apart from a traditional 'export,' seems much less fluid.

Comparing the services sectors is a good way to compare how nations are doing precisely because services are buffered from country-to-country. The EC Commission service-sector indices also confirm what the market indices show. That is that Germany's relative service sector performance is in a world of its own.

As one of the strong countries in EMU, Germany's contribution is not to buy from the rest of the zone or to spread stimulus or to be a real locomotive. Germany's economy does not 'locomote.' The Zone has no overarching government structure to redistribute when times get bad. There are no automatic stabilizers. And Germany is an economy that always stays within itself. It is highly competitive especially within the Zone. If any Zone nation starts to grow Germany is more likely to have its output servicing that rise in demand than anyone else. Thus Germany is in a position to snuff out the potential for that demand to spread multiplier effects elsewhere.

Not only is Germany not spreading growth by not running current account deficits as it has outperformed the rest of EMU, but it continues with export-led growth, a bane to the rest of Europe. On the policy side Germans continue to call for actions to make growth in the troubled South even weaker. You might agree with this policy. But it does nothing to bridge the performance divide in fact it exacerbates it.

A point I will continue to make until I am blue in the face (or, since I am typing, red in the fingers) 'the e-Zone is a currency Zone'.

That is why I write this 'e-Zone' small 'e' capital 'Z.' Since the 'e' stands for 'euro, the currency' not Europe I never capitalize it. And 'Zone' stands for the region itself. It should be the REGION that is important not the CURRENCY. But in Europe the Zone is at the mercy of the currency. If ever an economic policy were upside down this is it. Cart first, horse later...

The formation of the ZONE was supposed to help its members and also bring some geopolitical solace. At first it may have seemed to have done both. But it quite clearly is doing neither and the economic divide is now creating a geopolitical divide.

The widening gap between service sectors tells a real story. The euro-Zone is not a 'Zone' for anything except for a common currency. Despite the efforts to harmonize things they do not vibrate on the same frequency at all. The rules in EMU still effectively partition commerce but since banking was allowed to flourish and roam the region unrestricted this led to very unequal opportunities and it was the unleashing of banking while leasing commerce which lead to the catastrophe we now call the euro-Zone, and that some are working way too-hard to keep it that way. The indebted South could not have become so deeply indebted except by lending from the indebted North...and others.

Let me put it differently. The time to stop smoking is before you get cancer. But Europe has let the cancer of differential prices (about which we wrote yesterday) infect the Zone. Now fixing it will require major survey. Europe is trying essentially the homeopathic solution hoping to avoid the knife. But it is hard to see how that is possible. It is hard to see how nations are going to continue to make subservient the living standard of their people to maintaining a currency system that is flawed and that was formed with huge flaws. It's a Zone that and could be reformed and better administered after the learning garnered from the current failure is factored in. Europe needs more than a financial 'IV-drip' and a stiff upper lip. No one can keep their upper lip that stiff for that long. Europe needs surgery. Its people deserve something better than this extended torture of the economies in the South.

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