EMU Does Better Than Expected; Germany Best Of All

EMU confidence rose in December reaching the 70th percentile in its queue of values and topping its average by over six percentage points. Germany, France, Italy and the UK are the EU members in the table whose overall sentiment indices are back to or nearly so (in the case of Italy) or in excess of their period averages. Spain, Greece and Portugal lag. Spain's sentiment index is 10 percentage points below its average. Portugal is about 8% below its average. Greece is foundering with confidence one third below its average and with its current index in the bottom 2.4% of its queue, about as weak a reading as Greece has ever seen.

The chart at the top focuses on consumer sentiment in the EU format. Only Germany has rising confidence over the past six months. The UK had mounted a strong recovery from its cycle lows but that trend has collapsed. Among the largest EMU economies Italy has the lowest confidence reading followed by France and the UK. The French measure has been holding steady while the UK measure has been falling so that option of the ranking could change by mid-year.

Looking at consumer confidence alone in Greece its as low as it's been since 1990 in Portugal consumer confidence stands in the bottom 2% of its queue nearly as low as it's even been. Spain's consumer confidence stands in the 15th percentile of its range - another very weak reading. This is in sharp contrast to Germany where consumer confidence stands in the 99th percentile of its range. But France with confidence in the 47th percentile has the next strongest standing. Germany stands alone in the confidence game where the consumer is concerned. Also in the EU framework Germany is the only country in this group with a positive reading on consumer confidence.

As we think about the road ahead in 2011, there are many challenges. Debt problems overhang the economies that already have the most beaten down consumer confidence. The UK, an economy that has fared fairly well will be up against a stiff headwind as its significant austerity program kicks in in 2011. The UK may be doing something for its long term health but its economy is going to suffer in 2011 and its consumer confidence trend is already headed lower in anticipation.

Meanwhile, Germany, the country that has bankrolled the bailout and has been the advocate of austerity, continues to flourish in the environment it has created. Germany backed the bailout to preserve an EMU arrangement in which it is now clearly in the driver seat. Because of having run such a low inflation WITHIN EMU Germany has a clear cost advantage over other EMU states and the common currency locks in those advantages. Moreover, the German financial help has been of the barest sort. While everyone focuses on Irish banks going bust or the country Greece going bust, it was German and French banks that were most at risk to those bankruptcies. With some barebones German financial aid tied to some real austerity kickers Germany managed to save its banks and its own hide. Germany even got much of the EMU region kicking in too, to form the backstop. That backstop has let Greece hold on and that encouraged Ireland to make a banking sector crisis a matter of national indebtedness that now threatens the country's finances.

Those talking of Germany leaving EMU just don't get it. Germany is in the catbird's seat with huge competitiveness gains locked in. For these German gains to be eroded other EMU nations will have to run inflation rates LOWER than Germany's. This seems pretty unlikely.

What is hard to understand is why Ireland saved its banks and threw the entire country under the bus to do so. It got no better terms and conditions for an act that arguably saved EMU from coming apart given the ramifications of an Irish banking failure. If Ireland saved Europe, how was it paid back for this act? It wasn't. There are countries in EMU acting in ways that put the good of the union ahead of their own country. Despite public impressions, Germany is not one of them.

EU Sectors and Country level Overall Sentiment EU Dec
'10 Nov
'10 Oct
'10 Sep
'10 %-ile Rank Max Min Range Mean Overall Index 106.1 105.1 103.9 103.6 80.9 76 115 68 47 100 Industrial 4 0 0 -1 93.5 15 7 -39 46 -8 Consumer Confid -12 -11 -12 -12 58.8 140 2 -32 34 -11 Retail 8 3 3 2 100.0 1 8 -25 33 -6 Construction -28 -28 -28 -29 30.4 176 4 -42 46 -18 Services 6 8 5 5 58.7 118 32 -31 63 12   % M/M Dec
'10 Based on Level Level EMU 1.0% 1.3% 0.6% 106.2 77.9 78 116 71 46 100 Germany 1.3% 2.5% 0.3% 117.8 93.4 12 121 75 46 100 France 2.4% -0.9% 2.1% 106.7 73.1 73 119 74 44 100 Italy 0.8% 1.4% 0.3% 99.3 57.8 140 120 71 50 100 Spain -1.0% 0.3% -0.2% 89.9 40.7 209 116 72 44 100 Greece -2.1% -0.4% 1.1% 65.6 8.3 247 123 60 62 98 Portugal 3.3% -2.4% -2.2% 91.4 47.9 204 116 69 48 100 Memo:UK 0.7% 0.5% 0.3% 101.7 72.9 126 115 65 50 100 All since Oct 1994 253 -Count Services: 171 -Count Sentiment is an index, sector readings are net balance diffusion measures

EU Sectors and Country level Overall Sentiment
EU	By Queue Rank %	Average Level is:	Rank of Change
Overall Index	70.0%	100.1	66
Industrial	94.1%	-8.0	1
Consumer Confid	44.7%	-11.4	170
Retail	99.6%	-5.7	5
Construction	30.4%	-18.3	97
Services	31.0%	12.4	131
% Average
EMU	69.2%	106.1	54
Germany	95.3%	117.3	40
France	71.1%	106.6	29
Italy	44.7%	99.3	93
Spain	17.4%	90.3	173
Greece	2.4%	66.6	178
Portugal	19.4%	91.7	42
Memo:UK	50.2%	101.7	108
Sentiment is an index, sector readings are net balance diffusion measures