French MFG Gauge Sinks...Zonal Cooperation Moves to Co-optation and Risk

The Euro-Area is under pressure; France’s AAA rating is being assailed. But the French economy is also under a real grind to lower growth. Euro-Area members are simply in a very tight, pressured, uncomfortable place with little in the way of remedy in train. Are they waiting for real change or for Godot?

France’s MFG survey from INSEE saw its industrial trend index fall to a level of -37 in December from -35 in November. That reading ranks as the 230th lowest out of 264 observations back to January of 1990, leaving it in the bottom quarter of its historic queue of values. The production trend is the weakest of the surveyed components this month.

The strongest reading being made by ranking among the survey components is inventories which are at their 91st rank out of 264 leaving that gauge in the top 25% of its range…That might sound good, except that the inventory metric implies that inventories are ‘high’ while the production trend is weak so that this ‘strong’ inventory ranking is actually reinforcing the weak production trend.

The ‘recent ’and ‘likely’ production-trend measures also are weak with each residing in the bottom 30% of their respective historic queues. Orders and Foreign orders lie in the bottom 30th to 40th percentiles of their respective queues, still weak but not as distressed as for the production trend measures.

On balance France is seeing a lot of weakness creep into its MFG sector. The development is still relatively new. The trends were rising and were at a position of +21 in the first quarter of this year, just eight months ago. But then the bottom fell out. The graphs show that the pace of the fall off since Q1 is just about as rapid as it was in the financial crisis that threw the global economy into recession.

However, the depth of the drop of the French MFG gauge has not been nearly as far in late 2011 as in 2008, at least not yet. And there is some evidence that the pace of decline is letting up. In August, the index for production trend fell to -13 from +3. Then in September it took a bigger step lower to -30 from -13. But it stayed at -30 in Oct and slipped to just -35 in November and to -37 in December. Since April the monthly drop has averaged over seven points per month; since September it has averaged less than three points per month.

Still erosion continues and the Zone has not fixed its problems. This is not lingering weakness it is enduring weakness. Credit downgrades are in the cards for France and for others; the Eurozone banking system is still entangled and trying to freeze its exposures as uncertainty about the future course of action weighs heavy and everyone seems to fear exposure to everyone else, with just a few exceptions.

The zone’s remedies have not gone far enough; there is complete agreement on that. Where they go next will help to determine what Europe itself will become. But until Europe takes it next big step it will be doomed to continued erosion in confidence that will put it at risk to more things going wrong and to a step up in the rate of decline especially among the weakest.

Time is running out but no one can see the clock; no one knows when the end will come. But we do know that as the situation is getting worse, remedies become harder to find. Not making a decision is, in fact, making a decision for some. And as that happens, more and more euro-nations are going to be red-lined by bankers and will find themselves on ever-thinner ice. It is not a good way to start a new year.

Large, strong Euro-Area members can pretend that they are not at-fault when the ice breaks under its weakest members and they are swept by events out of the Zone. But the decision that is enhancing that very likelihood is being made now by the failure of the Zone to make the right and timely decisions that could stop it. I do not call for temporary fixes and financing but for Europe to face up to its structural issues and make decisions to show us who it wants on which side of the line and where the lines will be drawn for the ECB, on fiscal matters and on issues of intra-Zonal cooperation as well as how the current competitiveness divide will be or won’t be addressed. Either take the noose off from around the necks of the struggling Euro-Area members or kick the stool out from under their feet. But make a choice.