""Europe Recovers as U.S. Lags" « naked capitalism

Friday, August 14, 2009

""Europe Recovers as U.S. Lags"

It was conventional wisdom in the US and UK financial press that Europe was dong a hopelessly bad job of responding to the economic downturn, that it needed to do vastly more in the way of fiscal stimulus, that it was consigning its citizens to continued recession, and the Te Germans in particular were to blame for their conservatism re emergency fiscal measures. German readers begged to differ, pointing out the Germany (and the rest of Europe) has large automatic stabilizers (very generous unemployment insurance, for instance), making discretionary fiscal spending less necessary.

I was traveling along the Danube and Rhine in June, and saw far fewer signs of distress (like vacant retail stores) then I see is TARP-supported Manhattan. I thought this was merely sample bias, the vagaries of being in tourist areas (albeit before tourist season was in full swing) and discounted my impressions.

Turns out my sample may not have been so unrepresentative. The Wall Street Journal reports that Europe appears on the cusp of a bona fide recovery, with France and Germany both showing decent second quarter growth, while the US is trying to pretend that “things are getting worse less quickly” is tantamount to recovery.

Now are any of the Euro bashers about to give the EU authorities some credit? I doubt it.

And this disparity, if it persists, points to a much deeper issue. The US chose to deregulate across a wide range of activities and let the devil take the hindmost. Europe cares more about institutional frameworks and collective outcomes. US commentators regularly describe Europe a sclerotic. But if the EU winds up delivering better growth, what justification do we have for a system that seems best at redistributing income to teh top>

From the Wall Street Journal:

Germany and France have escaped from recession surprisingly quickly, outpacing the U.S. in returning to growth thanks in part to government stimulus efforts and consumer spending.

Germany, Europe’s biggest economy, grew at an annualized pace of 1.3% in the second quarter, while France, the region’s second-biggest economy, expanded at an annualized rate of 1.4%. Both countries recorded contractions for the previous four quarters, and bounced back earlier than other advanced economies including the U.S. and the U.K.

The news that Europe’s economic engine is rebounding suggests the region is joining the recovery under way in China and increasingly elsewhere in Asia, exemplified by India’s announcement Wednesday that industrial production in June rose nearly 8% from a year earlier.

That contrasts with uneven consumer spending in the U.S., where retail sales unexpectedly fell 0.1% in July, as American households are hurting from job losses, a weak housing market and tight credit…

The return to modest growth in Germany and France meant that GDP in the 16-nation euro currency zone fell at an annualized rate of 0.4% in the second quarter — a big improvement on the euro zone’s 9.7% pace of contraction in the first quarter.

Doubts persist about sustaining the recovery in Europe’s economic heartland next year. Stimulus measures, including programs to scrap old cars for more fuel-efficient ones will expire, while European banks continue to pare lending as they try to digest losses from the financial crisis and rebuild capital..

More on this topic (What's this?)

64 minutes to change your financial life … (Real Wealth - Global Wealth Report, 8/18/09)

IS EUROPE RECOVERING? (THE PRAGMATIC CAPITALIST, 8/22/09)

Germany, Europe, and America: Central Banks Growing Apart (Investment U, 6/22/09)

Read more on European Union, Investing in Germany at Wikinvest

24 Comments:

Anonymous says:

August 14, 2009 at 12:28 am

or maybe the very fact that we've printed money like mad and made trillions in transfer payments to the politically well-connected, while Germany refrained, is a demonstration that keynsian attempts at artificial stimulus exacerbate the very problems they purport to mitigate

Hugh says:

August 14, 2009 at 12:39 am

We really haven't tried a Keynesian approach to this crisis yet. The Obama stimulus was and is too little and too poorly structured and is dwarfed by unproductive aid to banks.

I don't think Europe is out of the woods by any means, but I do think their social safety nets especially in Western Europe are showing their worth at the moment. European banks still have very large exposures and I don't think they have deleveraged all that much. France in particular went for a stimulus program that seems to have worked but I don't see it as something they have the resources to sustain. As for China, I stopped believing their economic numbers, even in an impressionistic way, sometime ago.

Richard Kline says:

August 14, 2009 at 1:05 am

While I agree with all the points in your comment Hugh, to me the larger issue with relative recovery in France and Germany is, "Who's got the debt?" Areas that went nuts and bubbled up asset prices got burnt badly; they are not 'in recovery.' There is precious little recovery in the UK, Ireland, or Spain. Or in the US, but let's let that rest for the nonce. France and Germany didn't have a property bubble. It is also worth noting that they both have export-led macrostrategies. That accounts for their precipitous contraction of six-nine months ago when order flows hit their worst downspike, but allows for modest recovery now during our mid-year inventory bounce. Yes, yes: the banks in the Eurozone have major unresolved exposures. Whose don't? Europe has done at least as well propping up said banks as the US to this point; not necessarily a desirable intervention, but one that has assuredly stretched out the impact but of deleveraging but also lowered it's immediate severity.

It just wasn't in the ledgers that the Eurozone was going to collapse. Their position over the next three-four years relative to the US is enviable. No one should be surprised by this real if modest recovery there because it is in keeping with their exposures to losses. —And so is the situation of the US, that is the lesson. Stimulus and safety nets matters, but the largest determinate of the economic outcomes in the two places is the relative scale of the financial losses relative to their respective economies, and moreover how much of those losses directly impact consumer demand, i.e. very much in the US and only somewhat in much of the Eurozone.

The point to me in all this is, don't get caught up in competing narratives. Outcomes are largely being determined _by the basic facts or respective contexts_. Not all that surprising.

bb says:

August 14, 2009 at 1:32 am

Yves,
i think the reasons behind the positive GDP numbers in the eurozone and the ongoing recession are by design, not a reflection of the latest gov't policies.
the eurozone has always had generous unemployment benefits and increase in the unemployment by about 3-4% would hardly affect anyone (benefits are around 80% of regular pay and up to 2 years). then you have the manufacturing economy: countries actually produce stuff therefore they create capital. this increases the wealth of the society. credit cards has to be paid off by month end in france, in germany credit is not popular either.
on the other side of the atlantic and across the la manche, the economy is so hollow, most of it is based on services and growth is predicated on very high velocity of money multipliers. when employment falls, thise highly leveraged economies stall despite the gov't spending in the range 12-14% of GDP. absent such gov't interventions, those economies will indeed collapse.

having said all this, i do not expect any meaningful growth for at least 2-3 more years in the eurozone: capacity utilization worldwide is around 65%, europe is producing primarily capital goods, which require real capital, so the end consumers have to accumulate it. the u.s. is deep into debt and pay only in rapidly depreciating dollars, asia has as well ample idle capacity, and pay as well only in dollars.
the future does not seem bright for any country that does not have natural resources and has room to grow internally.

bb says:

August 14, 2009 at 1:46 am

and if i have not made myself clear enough:
in the us/uk 70% of the economic activity thrives on redistribution of the wealth created by the other 30% (2.3x leverage of services relative to productive activities).
in the eurozone the leverage is about 1x.

this is why you have hair-dos for $50 in the NYC suburbs, $220 tooth fillings, etc. the value of those 'services' is a tiny fraction in the eurozone. naturally, when a hairdresser or a dentist loses her job, the multiplier effect in the u.s. is much bigger than in the eurozone.

pigeon says:

August 14, 2009 at 2:03 am

Dear Yves,

a long time ago I complained on your blog that many economists failed to see the effect of these automatic stabilizers as opposed to direct stimulus and argued that Germany therefore has done pretty much in fending off the recession. In my opinion the government has reacted very wisely especially with four measures:
1. They extended the Kurzarbeitergeld (Government subsidy for reduced on duty hours) thus enabling companies to hold their skilled workforce much longer than previously.
2. They launched the Abwrackprämie (cash for clunkers program). While the longterm consequences of that measure are debated and likely to be negative, it was so timely that it saved the car industry from a major breakdown. Though it is not clear yet whether this breakdown was just put off a little into the future, the hope is that by then other sectors of the economy have recovered enough to bear that burden.
3. They guaranteed all personal bank desposits.
4. They nationalised Hypo Real Estate and part of Commerzbank.

Now the effect of government action clearly was a great deal of confidence in the populace and that has undoubtedly saved us from much trouble.

Regarding the recent positive GDP numbers there is a lot of enthusiasm in german newspapers right now. "THE RECESSION IS OVER"…
But I think a note of caution is necessary and I until now don't buy that story.
There is an uptick in demand for german exports due to global stimulus packages and rising oil prices, yes.
Consumer spending has been surprisingly positive, yes.
Government spending has gone up, yes.

But all that has a limited timeframe.
I think we will see a second dip in global GDP. By then Kurzarbeitergeld will have run out, german unemployment will have risen significantly.
International demand will contract again for just the same reason.
And so will consumer spending. Germans are slow to change habits but I think many already plan to do so.
Government spending is limited in that it is politically not accepted to run huge deficits over an extended period and that the Maastricht treaty prohibits it.
So the game is not over yet.

IF says:

August 14, 2009 at 2:21 am

I think pigeon has a good point. This article quotes Merkel as saying "
The times are unusually serious. We will lose about 6 percent [GDP] this year. That means we are not out of this crisis just because it went up a little bit." In other words, she seems less optimistic than Yves.

("Die Zeit ist ungewöhnlich ernst", sagte Merkel. "Wir werden dieses Jahr ungefähr minus 6 Prozent haben, plusminus. Das bedeutet, dass wir nicht aus der Krise sind, nur weil es das erste Mal ein bisschen hochgeht", meinte die Kanzlerin.)

http://www.stern.de/wirtschaft/news/maerkte/deutsche-wirtschaft-der-geborgte-aufschwung-1503330.html

Captain Teeb says:

August 14, 2009 at 2:42 am

@BB: Good point about credit cards. I live in Belgium, where one's credit card balance is automatically paid in full at month end. You are not allowed to carry a balance (the UK and Ireland are exceptions to this rule). This is significant not only in relation to consumer debt, but also in consumers' attitude toward debt generally. While eurozone governments are heavily indebted, consumers (and, I suspect, firms) are much less so.

As a freelancer, I meet and know a lot of people here. I don't know of anyone who is unemployed, and only the freelancers are even worried. In such a context, it's easy to see how consumers can carry on more or less normally.

Anonymous says:

August 14, 2009 at 4:17 am

also don't forget that france and germany do not make up all of europe. in spain and eastern europe the situation looks much worse,and it might be the case that france and germany are recovering on the backs of the debtor nations in europe whose property markets bubbled up over the last 5 years or so. In the united states we might see the same thing: areas such as texas might see a sustained recovery while california and florida remain mired in debt and asset depreciation.

Donlast says:

August 14, 2009 at 5:22 am

The GDP "recovery" is basically because there was a sharp drop in imports.

Diego says:

August 14, 2009 at 5:39 am

also don't forget that france and germany do not make up all of europe. in spain and eastern europe the situation looks much worse,and it might be the case that france and germany are recovering on the backs of the debtor nations in europe whose property markets bubbled up over the last 5 years or so.

This may be the case in the future, but Germany's GDP has suffered more than Spain's or the UK's, as of today and taking this recent upward blip into account. France's position is a bit better, indeed.

And Eastern Europe is in an even better position, since credit was/is underdeveloped and they have a long way of economic growth just to catch up with Western European standards. Baltic countries are an insignificant part of Eastern EU's economy.

Ryan says:

August 14, 2009 at 9:50 am

This may be the case in the future, but Germany's GDP has suffered more than Spain's or the UK's, as of today and taking this recent upward blip into account. France's position is a bit better, indeed.

Yes, but if countries like Spain, Greece, Ireland, Italy, etc., decrease significantly, since they hold the same country the Eurozone which is largely Franco-German centered is going to have to do something. What is that? No one has answered that question yet. Either Greece or Spain will be the country that brings that question to the top, perhaps within a year.

jest says:

August 14, 2009 at 9:55 am

Diego-

Re: Eastern Europe

We also have to remember the precarious state that the Euro banks are in b/c of the many questionable loans made to Eastern Europe. Germany in particular is not out of the woods yet because of them. Especially since most of those loans are denominated in the Euro, not the local currency.

If the recovery does take hold, that has implications for a rising Euro, and potentially puts countries like Latvia and Hungary (and by extension Deutsche Bank & Co.) in an even more compromised position.

Siggy says:

August 14, 2009 at 10:06 am

Has Europe really begun a recovery; or, has it stopped declining? It strikes me as being a bit premature to render such a judgement.

Lets take a look at it at year end. We may see a very different picture.

Rick says:

August 14, 2009 at 10:23 am

Hello,

Having lived in Europe and the US….

Europe always lags the US in terms of growth rate and recovery timeline. Why? Because of structural and political environments it takes much longer to fire someone. Then those fired or those resigning all get unemployment at a high percentage of their last salary (spanning over the last x months). Therefore they retain a large portion of their purchasing power for a longer time than americans could until lately.

But when the recovery comes, usually european companies take longer to re-hire as they fear that the recovery is not strong enough but also because hiring someone means a lot of social charges added to total expenses. Companies must tell and future fired employee 2wks to 2 mths in advance that they will be fired. So, because the cost of hiring (direct and indirect) is so high it restrains fast and strong hirings.

The EU bloc works as follow. When one country is in a bad position (Economy), the other countries will pay into a common account to be spread to poorer countries part of the EU. Because so many EU countries are in a very difficult financial situation it may prove delicate for the larger countries to balance their own Economy growth/recovery and the payment into the common account to support failing economies around them. Mostly Germany, France are the strongest (historically too).

Otherwise, a haircut in Switzerland for a man is minimum $30 and woman $50-60 and going to the dentist runs easily in the $300 for a normal check-up. A big mac meal in Switzerland costs about $10 and a Vodka/Red Bull is minimum $15.

I never trust anyone who is going to tell me that after 1 positive quarter following 4-5 declining the Economy is in a recovery. What is a recovery? When does it starts? Now, show me 2-3 quarters of increasing growth rate and then I will say ok. But for now, it is only an uptick due to exogenous factors mostly.

Also to notice that each large EU country relies heavily on the Financial sector which brings higher than average salaries and therefore is an excellent catalytic for growth. Well this population has been shrinking seriously and still shrinking which brings the question about who is capable of spending as much as they used to?

Finally the wind of any recession starting in the USA takes a bit longer to really hit the shore of 'old' Europe.

Sincerely,

Diego says:

August 14, 2009 at 11:48 am

Ryan,

Greece, Portugal, etc. are already growing. And Spain's GDP has not fallen as much as Germany and others.

The simplification that PIIGS = backward, declining economy and Germany = advanced, growing economy has no empirical fundament. But for Italy, the so-called PIIGS have been the countries with highest growth in the Eurozone in the last decade, while Germany barely grew at all.

I'd expect this behaviour to continue for at least another decade.

Diego says:

August 14, 2009 at 11:58 am

jest,

Latvia is a tiny country with a tiny population and an even tinier economy. Even if it disappeared off the map tomorrow, the European economy would remain unaffected.

Most of Eastern Europe is in a very healthy position. Poland, the Czech Republic and Slovakia will resume meteoric growth (5% to 8%) in a year from now; Hungary may need to wait a couple of years, but that's all.

Once you put middle-income countries under EU laws and guarantees and you transfer them billions to improve infrastructure, you can't avoid their becoming advanced economies.

the bankster says:

August 14, 2009 at 6:30 pm

How much did the change in the trade balance contribute to this week's upside German GDP surprise? Collapsing trade is distorting headline numbers and have added significantly to US "growth" during the last 2 quarters. These effects net to zero globablly anyway so Germany's gain is its trading partners' loss.

the destatis english release only notes this:

As price-adjusted imports declined far more sharply than exports, the balance of exports and imports also had a positive effect on GDP growth.

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2009/08/PE09__298__811,templateId=renderPrint.psml

My guess is there is less to this European recovery than you think.

the bankster

Anonymous says:

August 15, 2009 at 4:24 pm

The analysis is wrong. The entrepreneurial class in America is sitting on their money because they are afraid of tax increases and radical changes to social policy, whereas in France and Germany those countries are being run by conservatives who are not saying they are going to raise taxes and add social programs. Only a died in the wool socialist would draw such a ridiculous conclusion.

Yves Smith says:

August 15, 2009 at 7:53 pm

Anon of 5:24 PM,

With all due respect, all you have offered is personal opinion, or more accurately, personal prejudice. And you dismiss the opposing view with an ad hominem attack. a logical fallacy, rather than engage in a real discussion. Not a way to win friends or influence people.

You assert that people are not starting new businesses because an well funded entrepreneurial class is sitting on its hands, afraid of higher taxes. Pray tell, then why does much more highly taxed Europe have more small businesses? And I can make a counterargument, as someone who actually runs a small business, is that they are one of the last best tax shelters. But having said that, the corporate meal ticket is still a much better deal if you can tolerate the BS.

And you have your supposed facts 100% wrong. It is a common fallacy to think that money is what drives new business formation. That is simply incorrect. Only a very teeny portion of businesses are funded by venture capital or angels, a mere 1%. The vast majority are started by owner-managers, typically with very little invested capital, and that comes from personal savings, friends and family, and credit card borrowings. Amar Bhide has written extensively about it. He has also found that most of the high-success, high growth startups come from the bootstrap finance model, not the VC model.

Doug Nusbaum says:

August 16, 2009 at 12:41 am

Let me go the meta comment route. Most of what we see here are symptoms of a much deeper underlying problem that is, more or less, genetic in origin. Or at least an outgrowth evolutionary competition. I call the discussion Orwell's Boot. >From the book 1984

"If you want a vision of the future, imagine a boot stamping on a human face – forever."
To paraphrase Sun Tzu: If you do not know the nature of the problem you are dead meat. Please go here,

http://factotum666.livejournal.com/829.html#cutid1

read and comment I would like to start a discussion among people who agree that we do not know why more people do not want freedom, and how we may address the problem of growing government and eroding freedoms.

Ray says:

August 16, 2009 at 8:12 am

As an 85yr old VFW with college education, it has been fascinating to read and learn all about comparisons with Europe and American differences in the economy. Standing out to me is the requirement to pay balances on credit cards as a starting point for Americans. Going back to living within your means, giving honest hard work to your employer, and getting promoted for your efforts. Common sense government regulations. I agree that our health system needs overhaul with starting point requirement for all doctors to electronically both keep medical history and issue presciptions. It seems to me that a good amount of common sense without all the oratory would be helpful. In ending, I have had the priviledge to visit many foreign countries, and i would not trade my American citizenship ever.

BBL Jr says:

August 16, 2009 at 10:07 pm

Europe survives now because of the U.S. The money we have spent saving Europe and policing the world is crippling us. They spend almost nothing on defense of their own freedoms. When we come to our senses and stop paying for their defense they will fail.Even in Britain now, they would rather give up freedom than annoy some anarchist muslim.

Anonymous says:

August 17, 2009 at 11:34 am

Well,
from the moment you understand the basic differences in the way the whole sociaty is treated in respective countries you will why one of them could pull faster than another.

In USA, the system is almost completely off, giving good entrepreneurs best chance to grow up their company and with that make country richer.
You (used to have) many credit cards, buying house was easy, etc…credit based economy.
This works as long as people are aware of their limits and/or not to greedy. We all know humans. You can't count on the to do self control.
Latest crisis is the best proof.
So what you do? You put state control.
That's what exist in Europe. Its slower, more complex, you can freak out. But you can not bring down country on its knees as Madoff & Co did to the USA (and the World).

Just like in proverb "the higher you fly, the more it hurts when you fall down". USA used to fly way too high. I cant blame normal American citizens. But leading ones yes. Well, they were flying too high also.

I believe that USA will be faster to recover, but the crisis will have smaller (not small) impact in Europe as regulations that existed here protected country from this kind of doom. These regulations are now starting to be used in USA too.
And,no its nothing to do with socialism. It has to do with human iresponsability and greed and the best way to control before it takes all down for good.

Greeting from Geneva

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