Italy's Orders Begin To Outdistance France's And Euro Area Problems Come With An All-Too-Common Theme

Orders do slow: French orders growth has slowed considerably to just 0.6% year-over-year while for Italy year-over-year growth is still at 12.6%. Foreign growth is still strong for both France and Italy making domestic orders growth the place where there is a real difference.

In France industrial output is up at a pace of 4.9% over 12-months whereas for Italy sales growth is up at an 11% pace.

Competitiveness Vs domestic demand - However in terms of recent growth France is not showing pronounced weakness. In the quarter-to-date France is actually outperforming Italy with foreign orders growth that exceeds the growth in Italy's foreign orders. That may just be the luck of the timing of orders which recently have been very volatile since growth in Italian orders exceeds that for France over three-months and over six-months although in terms of foreign orders alone France does stand up better to Italy in terms of its broader recent trends. France seems to be having more trouble in maintain domestic demand but its international competitiveness seems to be still intact.

A maturing Biz-cycle - The lesson here is that the business cycle in Europe is maturing. While the initial stage of recovery usually finds that changed economic conditions lift all boats, as the recovery matures there is a sorting out among the those ones that really are competitive and those that really are falling behind. France and Italy are examples of EMU members that are doing relatively well. But we can broaden our understanding of the EMU issue by looking at the table below.

Italy Orders
Saar Except m/m	Sep-10	Aug-10	Jul-10	3-mo	6-mo	12-mo	QTR- 2-date	%Peak
Total	-1.2%	6.8%	-1.7%	15.7%	21.9%	17.2%	9.0%	82.4%
Foreign	-7.8%	10.3%	1.0%	11.1%	19.2%	20.8%	13.4%	76.8%
Domestic	3.1%	4.6%	-3.2%	18.5%	23.1%	15.2%	6.4%	80.9%
Memo
Sales	-0.3%	2.6%	-2.5%	-0.8%	10.4%	10.8%	8.3%	85.5%
French Orders
Saar except m/m	Sep-10	Aug-10	Jul-10	3-mo	6-mo	12-mo	Q-2-D	% Peak
Total	-1.6%	-0.9%	2.2%	-1.3%	-1.7%	0.6%	12.6%	71.0%
Foreign	-0.2%	-1.7%	5.3%	13.8%	5.8%	15.3%	19.0%	79.8%
IP xConstruct	-0.1%	0.1%	1.3%	5.4%	1.8%	4.9%	3.0%	87.3%

Trouble in paradise - Interestingly while there is a focus in Europe on debt and certainly differences in government fiscal policies lay behind what we about to cite, the countries with difficulties emerge immediately from a table of EMU members by arraying them according to their cumulative national price level increases for Core prices since the inception of EMU.

Inflation differences tell the story - In the final column of this table we list the gap between that nation's rate of core inflation and the rate reported for EMU as a whole. Of those with excessive increases in their domestic price level relative to that for EMU as a whole only the principality of Luxembourg, clearly an unusual place, escapes the list of countries that now are on the troubled list. Greece's price level, as of Sept, had risen 20% beyond that of the average for the zone and more than 28% more than Germany's. Spain's price level has advanced more than 12% more than for the zone. Portugal's has advanced nearly 9% more than for the Zone, about the same as Ireland. Italy is in a sort of no-mans land having seen it's price level rise by about 6% more than the Euro-Area average. Belgium and The Netherlands have been near the average Austria, Finland, France, and Germany have been below the average.

Germany's private game preserve - So as the recovery begins to unfold in a more mature stage those countries with true competitiveness will do better, Since the EMU is a one-currency zone German exports' to destinations inside the EMU block are the most competitive of any EMU member in this table. Its like the medieval king having his own private game preserve in which he can hunt and have an advantage. Is Germany and anchor of inflation stability or a dead weight of low growth that holds the region back?

Common currency giveth and taketh away - Inflation differences appear to be a big red flag for building troubles ion this fixed exchange rate area. This is something the new EMU members should keep in mind. A common currency can shield a nation from certain forces but if policy is not well run it will eventually expose the transgressor to other difficulties.

Das Zone - One thing Europe has simply not come to terms with is that its monetary policy and the competitiveness situation is being dictated on German terms even though this never has been formally approved within EMU. Germany, with its lowest-of-all inflation rate continues to have the competitiveness edge and the strongest economy so that when things go wrong Germany dictates policy. This is what happened in early 2010 and now the German tilt to austerity is causing more problems to bubble to the surface. It is not clear that such a state of affairs will prove to be stable for the Euro-Area.

Why not call it the Deutsche mark and the DeutschEuro-Area and be done with it? - Bernanke's speech singles out surplus countries that do not stimulate domestic demand and that puts Germany right in the bulls eye. Yet Germany is happy with its result and its position of strength in the policymaking world. This position is exactly one that troubles the Fed Chairman. With Germany effectively dictating Euro-Area policy it puts the Zone in the bull's eye as well. Is the rest of Europe as happy as Germany? I suspect not.

Broader implications

Beyond our means or something else? - The classical explanation of a country like the US running a balance of payments deficit (current account deficits) is that it is 'living beyond its means.' That would seem to put the onus of adjustment on the US for its excessive consumption. But the US also is growing at less than its potential. That would seem to put the onus elsewhere. The 'expression living beyond one's means' is an unfortunate label for a country running a current account deficit, for the label may or may not be true.

Different strokes for different folks - If nations have different choices for growth and one chooses a stronger growth path and the other a weaker one, the stronger growing country will either run persistent trade gaps or have a chronically falling currency - unless someone/thing stops the currency from falling.

The target of someone else's means - The growth rate a country can have, and still maintain a balance-of-payments equilibrium, is partly a function of what its trade partners do. In the case of the US economy many of its partners choose slower domestic growth rates, they supplement growth overall by tapping US domestic demand via exports. They sustain that by keeping the dollar overvalued by buying the dollar and moving it into their FX reserves. So US deficits grow and the dollar becomes overvalued. That is not the US living beyond its means.

Remedies??? This puts the idea of living beyond your means in a new light. Bernanke's speech tried once again to shine a light on these issues. It tried to point out that the structure of trade balances is due to the interaction of growth choices and the lack of exchange rate rules and the lack of global adjustment policy guidelines. He has tried to show how selfish national policies lead to unsustainable results. We can see those very factors playing out within Europe. We can identify more pressures in train, there. We can trace the footsteps from these very transgressions back through the financial crisis from which we just emerged.

But will we do anything about it?

Or just say, nice speech, Ben?

Trouble in the Zone?     High 2 Low Gap  HICP-CORE Sep-10 Rank W/EMU Austria 20.3% 9 -1.8% Belgium 22.5% 8 0.4% Finland 19.9% 10 -2.1% France 19.7% 11 -2.3% Germany 14.2% 12 -7.8% Greece 42.4% 1 20.4% Ireland 30.8% 4 8.8% Italy 27.9% 6 5.9% Luxembourg 32.6% 3 10.5% The Netherlands 23.2% 7 1.2% Portugal 30.7% 5 8.7% Spain 34.2% 2 12.2% EMU Total 22.0% #N/A 0.0% Max Diff: Gy Greece:     -28.2%