EU Indices Show Improvement and Signs of Strain, Too

By sector retailing has the highest rank in its historic queue of values followed by the industrial sector. Construction is the weakest sector followed by services. But the change in the services index this month was the 13th largest monthly gain in its history so that sector is beginning to improve.

Germany showed the greatest index gain this month compared to its history of monthly changes with Portugal showing the weakest change and Greece the second weakest among those pictured in the table. In terms of absolute percentile standings, Germany is in the 94th percentile of this historic range Greece is in the bottom 3% of its range and Portugal is in the bottom 13th percentile followed by Spain in the bottom 18th percentile of its queue standing.

The stratification of standings across countries is no surprise. The events of this weekend underscore that there are vast differences among EMU countries and one of the biggest challenges for the Zone will be in making a single monetary policy that is suitable for all of them. Because the e-Zone is only a monetary zone regional fractures that require cross broader resource transfers or loans create tensions in the Zone, more so that in a large single political unit such as the United States, where states’ identities are still clear but where the glue at their borders is not in doubt.

The Euro Area was badly conceived as fiscal rules were too loose. Some of the nations in the Zone have run inflation rates that have further widened price level differences (exacerbating competitiveness issues) within the currency area, instead of narrowing them. This is a difficult and painful situation to remedy. Countries within the Zone cannot depreciate against one another; they are in a locked currency grid. Since December of 1998 German core HICP inflation has fallen nearly 8% below the e-Zone average while Greece is 20% above that average, Spain is 12% above that average, Portugal and Ireland are nearly 9% above that average and Italy is 6% above that average. Those are huge shifts of competitiveness to give away within a fixed exchange rate system. That list of higher than average inflation countries pretty much identifies the countries that are under pressure in the Zone, too. Putting that toothpaste back in the tube will be a huge job. It will take more than just financing.

The current bail out of Ireland has shifted eyes to Portugal and to Spain, Spain being a much larger potential problem than the all the previous countries with difficulties combined. Spain is a large e-Zone nation. The Irish bail out has ratcheted Irelands already large deficit-to-GDP ratio from 12% to 32% and some seem to think it can deal with that. Such a burden from the bailout must be viewed with extreme suspicion. Ireland will now operate with a huge weight around its neck. However, any plan that would have given it debt relief would have impacted the international banking system which may still not be off the hook. As Ireland wavers in its task, the banks will remain nervous. On top of that, concerns continue to mount about who is next. Italy’s bonds’ spread to Germany bunds ratcheted to a historic high today. That’s not exactly a vote of confidence in the steps that have been taken.

The economic news shows progress; the burden for the future on some Zone economies is nonetheless huge. The challenge for the ECB to make one monetary policy that can survive these sorts of strains; it is an extreme challenge, the ultimate reality show. With such a Bundesbank-influenced staff we know how the ECB will tilt its policy and that just brings us back to being skeptical about how this sort of a bailout can work, one that just mounds up the debt on a troubled economy. Have Europe’s banks been saved or are they standing on still-thin ice that continues to make strange cracking sounds? I guess it’s probably not a good time to do another round of stress tests on Europe’s banks, is it?

EU Sectors & Country Level Overall Sentiment EU Nov Oct Sep Aug % Rank Max Min Range Mean By
Queue
Rank% Overall
Index 105.2 103.9 103.6 103.2 79.0 81 115 68 47 100 68.0% Industrial 1 0 -1 -2 87.0 41 7 -39 46 -8 83.8% Consumer
Confidence -11 -12 -12 -11 61.8 119 2 -32 34 -11 53.0% Retail 3 3 2 1 90.3 11 6 -25 31 -6 95.7% Constr -29 -28 -29 -31 28.3 187 4 -42 46 -18 26.1% Services 8 5 5 5 61.9 112 32 -31 63 13 34.1%   % M/M Nov Based on Level Level    EMU 1.4% 0.5% 1.0% 105.3 75.9 89 116 71 46 100 64.8%  Germany 2.5% 0.3% 1.8% 116.3 90.1 15 121 75 46 100 94.1%   France -0.2% 2.1% 0.3% 104.9 69.1 95 119 74 44 100 62.5%   Italy 1.4% 0.3% -1.2% 98.5 56.2 149 120 71 50 100 41.1%   Spain 0.3% -0.2% 1.2% 90.8 42.8 206 116 72 44 100 18.6% Greece -0.4% 1.1% -1.9% 67.0 10.6 245 123 60 62 99 3.2% Portugal -2.4% -2.2% 2.1% 88.5 41.8 219 116 69 48 100 13.4% Memo:UK 0.5% 0.3% -2.1% 101.0 71.5 132 115 65 50 100 47.8% All since Oct 1994 253 -Count Services: 170 -Count Sentiment is an index, sector readings are net balance diffusion measures