Europe’s Recession Has Barely Begun

By Delusional Economics, who is horrified at the state of economic commentary in Australia and is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness.

The reserves from the ECB’s LTRO stage II operation are making their way back into the excess reserve facility at the ECB. The overnight holdings were at an all time record of €820.81bn. As I explained previously, this in itself isn’t a problem. In fact, unless the reserves are moving to some other non-commercial bank accounts at the ECB there is little other place they can go. However, what is the problem:

…is that the increasing use of the ECB’s marginal lending facility shows that not all of these parked reserves are actually “excess to market requirements”.

The statistics from last night show that for the last 3 days there is still €783 million being rolled over using the ECB’s margin lending facility. With €0.8trn technically available for interbank lending it is certainly a concern that there is at least one bank still having to lean on the ECB for overnight liquidity. Once again this suggests the ECB is still holding up zombie banks that other banks are unwilling to trade with.

On top of the LTRO outcomes I have been running two major risk themes on Europe under the current “plan” over the last few months. Firstly the major one:

Periphery nations weakening, France in the middle, Germany outperforming, but the whole ship slowly sinking.

Secondly, on top of the obvious problems in Greece and Portugal, the “black cygnet” that is Spain:

.. Spain which I consider to be the major unrecognised problem. The country has seen its yields tumble since December on the back of the ECB’s 3-year LTRO but there hasn’t been anything in the economic metrics of the country to support such action. Spain has 23% unemployment and still rising, the banking system is under-capitalised and still has unknown exposure to the country’s housing market collapse. On top of that the rising unemployment rates is pushing up bad loans in the banking system to 7.4%, a 17-year high, and is still rising.

You can read more about my expected outcomes for Europe here, but in short, my base case is that the fiscal compact will never actually be implemented because member nations will look to Greece and Portugal and quickly realise it is economic suicide to attempt to deleverage the government sector of a non-export competitive euro-bound nation at a time when the private sector has no capacity to provide the required counter measures. That is, increased production, dis-saving and/or additional debt. As I noted yesterday, it appears Spain has already come to that conclusion and is now openly rebuking Europe’s call for it to meet unachievable deficit targets over the next financial period.

Overnight Markit Economics put out the latest PMI data for much of Europe which certainly highlights the themes I have been discussing.

From the weakening periphery, Spain:

Reversing the slower rates of decline seen in recent months, activity and new business both decreased at much sharper rates in February as the economic crisis in Spain showed no sign of abating. The fall in new orders at service providers was recorded in spite of further steep price discounting, while input costs remained unchanged.

The headline seasonally adjusted Business Activity Index – which is based on a single question asking respondents to report on the actual change in business activity at their companies compared to one month ago – fell to 41.9 in February, much lower than the 46.1 recorded in January. The latest reading signalled the steepest rate of contraction since November 2011. Again, the economic crisis engulfing Spain was cited as a key factor behind the drop in activity.

From the middle, France:

Recent growth of French service sector output slowed to a halt in February, as activity levels stagnated. This was despite a marginal rise in new work intakes, with poor weather impeding output. Nonetheless, backlogs of work declined again, albeit only slightly. A mild increase in staffing levels was indicated. Future expectations strengthened markedly in February, albeit remaining below the long-run series trend. Meanwhile, strong competition led to a further reduction in output prices despite solid input cost inflation.

The seasonally adjusted final Markit France Services Business Activity Index – which is based on a single question asking respondents to report on the actual change in business activity at their companies compared with one month ago – registered 50.0, down from 52.3 in January. In line with the neutral threshold, the latest reading pointed to a flat level of activity on the month.

And from the outperforming Germany:

February data suggested that Germany’s service sector continued its steady upturn from the general weakness seen in the second half of 2011. This was highlighted by a further moderate rise in business activity, alongside the most marked increase in new work since last July. Service providers’ confidence in the year-ahead outlook also continued to improve, with around twice as many firms expecting an increase in activity as those that forecast a reduction. That said, jobs growth eased to its lowest since June 2010 and robust input cost inflation persisted in the service sector.

At 52.8 in February, down slightly from 53.7 in January, the final headline seasonally adjusted Germany Services Business Activity Index was above the 50.0 no-change value for the fifth consecutive month. The latest reading – which is based on a single question asking respondents to report on the actual change in business activity at their companies compared to one month ago – was close to the long-run series average (53.1) and indicates a relatively solid rate of output expansion. Growth of business activity was recorded in four of the six sub-sectors monitored in February, with Renting & Business Activities and Transport & Storage the exceptions.

While the whole ship slowly sinks:

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  1. Very Serious Sam

    The whole ship sank very much faster and deeper a few years ago, and resurfaced as quickly.

  2. Hilary Barnes

    “I am Rajoy. I proclaim
    I let no one piss on Spain.
    We can take just so much pain.
    If you don’t know that then think again”

  3. Ignacio

    January data on bank lending in Spain indicates that in yoy comparisons, corporate credit has increased slighly (over 6%) and it seems that the LTRO has resulted in reduced interest rates in corporate credit compared with the 2nd half of 2011.

    On the other side, household loans approved for home purchases have plunged by almost 20% YOY and the total amount of loans approved in january for home purchases were at record lows (since 2003 we don’t have previous data). Also the average interest rate charged in mortgages increased in January despite LTRO efforts.

    So, despite ECB efforts for liquidity, the housing market in Spain is dead but the LTRO seems to have an effect on corporate lending. I totally agree with the author’s statement saying that:

    “the banking system is under-capitalised and still has unknown exposure to the country’s housing market collapse”

  4. Maju

    IMO the main problem in Spain (and EU in general) is the reduction of public expending, which is absurd and suicidal. In this sense what Rajoy is doing is mostly a Quixotic gesture for the gallery. After all he’s not questioning the absurd idea that debt must be paid when it cannot be paid nor that public spending must be cut even if that destroys the economy, but just bargaining over the details: he knows that the German-IMF hand is poor, that Merkel has been bluffing at least a bit all this time, and that (with no opposition whatsoever) she’s grown used to bluff more and more boldly.

    It’s a safe win bet and a gesture that will no doubt help him to overcome the bad image caused by the new brutal cuts, not just in budget but also in labor rights. I’d dare say that this posturing is, if not staged, at least widely expected. This way the European right opposes itself and undercuts the potential support of the left somewhat. Let’s not forget that Merkel and Rajoy are party buddies.

    Sadly enough these measures are useless and will only cause more popular anger (let’s not forget that the PP almost gained no votes in last elections but benefited from the scatter of angry voters to many small lists: their sociological base is much weaker than it may seem from seats in parliament) and, critically, more destruction of not just jobs but whole companies.

    Much of the economy in any country depends on the state: from military to public works, a host of private companies, often a major pillar of the overall economy, depend on public spending – never mind public servants. Sudden budgetary cuts, specially in times of contraction, can only wreak havoc.

    So I think this is more posturing than anything else. Otherwise, there would be radical demands for the BCE to inject money, not anymore to useless selfish private banks which do not loan it, but directly to the states or the public, which are likely to use it better than the banksters.

    This is of course out of Rajoy’s horizon of events. But it’s the way to go. It was actually the way to go years ago, now it may already be too late but I can’t think of anything else other than the Cuban model (which in the Greek case is probably already the only reasonable option).

    1. Dan Kervick

      You’ve got it. Europe has gone stark raving bonkers. They are shooting their members in the head one-by-one to enforce a “no overeating” rule.

    2. Jim

      IMHO the primary problem with Europe is lack of growth. And Europe, especially the peripheral countries, won’t start materially growing until they leave the Eurozone.

      There is another way out, however.

      The northern European countries can commit to a PERMANENT fiscal transfer of 7% of their GDP, annually, to the southern European countries.

      Absent that, the Eurozone is destined for failure.

      1. Maju

        That’s a fallacy: it’s not the Eurozone as such but the rigid BCE design and the stubbornness against its reform: if the BCE would be lending to states and if the euro would be reasonably weaker, there would be problems but not a fraction of them. The real problem is that this design is useful only for a minority of Europeans, the Germans, and that means that, if anyone has to leave that’s them.

        But wait… if they do, then they’d lose their neo-colonies and disaster may ensue for them. So they stick to the Eurozone bringing everybody else down for them.

        It’s a design problem and the fact that Germany is sucking up the wealth of its partner-slaves.

        1. Jim

          Maju, the BCE was intentionally designed that way in order to get the approval of the German voters. You want a more lax BCE, then have the German voters express their view in a referendum.

          With respect to slavery, I recall the slaves not having the option of leaving their slaveowner. In fact, if they did attempt to leave, they would be shot.

          Is anyone impeding Spain or Greece’s departure from the Eurozone?

          1. Maju

            The German voters were never asked. Nobody was ever asked about the BCE or the euro. The only referendum was going to be about the European Constitution, a mostly unrelated subject, the peoples (not the Germans but the French, the Dutch, the Irish…) voted no and still we had to swallow it under a new name.

            Don’t make up things.

            Also peripheral Europe won’t leave the Eurozone, don’t hallucinate, please. That would be suicidal (equivalent to being shot – same for your usual “free worker”: leaving a job is normally a suicide, not big difference between slavery and “free work”). What will happen in due time will be that (1) their governments will have to become bolder and demand real participation in the BCE management and that (2) German economy will also collapse (it does not exist in a bubble) and it will be the Germans who will demand euro-devaluation.

            “Is anyone impeding Spain or Greece’s departure from the Eurozone?”

            Is anyone impeding Germany’s departure? Why would Germany have to impose their criterium? Germans are not majority in the Eurozone, not by far.

  5. Dan G

    “… my base case is that the fiscal compact will never actually be implemented because member nations will look to Greece and Portugal and quickly realise it is economic suicide to attempt to deleverage the government sector of a non-export competitive euro-bound nation at a time when the private sector has no capacity to provide the required counter measures.”
    In addition, why the hell would any of the hurting countries agree to troika lifelong slavery terms while Greece gets cut slack.
    Look for toubled counries’ yields to resume their upward motion as the risk becomes blatantly apparent.
    The fact that CDS holders are being ignored, and bond holders having to stand behind the ECB before collecting will only exasperate the situation.

    1. votersway

      Stimulus can’t fix the problems of unbalanced trade, it can make them worse. Current account imbalances are the major, major reason for all problems, including the one in the US. That’s the reason for falling house prices, etc.

      The fact that mercantilists such as China and Germany keep their victims on life support means nothing – mercantilism is similar to suicide-bombing, it ruins both sides in the end. Germany is experienced in that kind of stuff. Unfortunately everyone will suffer.

      1. F. Beard

        Stimulus can’t fix the problems of unbalanced trade, it can make them worse. votersway

        How? We print money; China gives us real goods.

        Where’s the problem?

        1. different clue

          China only “gives” us real goods in order to price-undercut the producers of real goods here in America. (And is the picture any different in China’s other market targets?)
          The production of real goods is shut down in America and built up in China. Millions of Americans are left with no job, nothing to do, no prospect of anything to do.

          If your job went to China, you would understand the problem. Since you clearly don’t understand the problem, I suspect your job or other income-source has not gone to China; which means you are economic-security-privileged in a way that most people no longer are.

          1. F. Beard

            That’s a different topic. I entirely sympathize with workers whose jobs have been outsourced and automated away with their own stolen purchasing power. That’s a consequence of our money system not free trade.

          2. votersway

            @F. Beard

            If there was automation, we would work LESS HOURS and get more goods – AT FULL EMPLOYMENT. Automation pays the bills and supports life with less work – this isn’t what’s happening.

            The “automation” currently consists of poor Chinese nailed to the the chairs 12×6. “Automation” is a funny way to put it.

            Only balanced trade is truly free, unbalanced trade leads to a phony service economy and subjugated, poor existence.

            Unbalanced trade is the real problem. You don’t understand the real problem in the same way you don’t understand what real goods is. (or you don’t want to)

          3. Maju

            It’s a consequence of free trade/globalization. It would be no different with gold standard or anything else: the problem is caused by brutal de-regulation of international trade without setting safeguards re. labor rights or environmental protection.

            As result child slave labor high pollution capitalist “paradises” (true hells for the people, and China is not the worst case probably) can out-compete any state where workers still have some rights or social services, or where pollution is being kept under some control.

            You sign Bretton Woods without imposing hidden costs (labor rights/environmental protection) clauses and this is what you get: corporations emigrate to slave labor dumpster zones, damaging your jobs, their life conditions and everybody’s planet.

        2. votersway

          The CAPITAL STOCK is THE REAL GOODS. The readers of this site might be more familiar with the term MEANS OF PRODUCTION.

          The landfill filler you get from China has nothing to do with real goods. It’s garbage in disguise. You are not exchanging paper for gadgets, you are exchanging your industry and skills for landfill-destined plastic and colored glass marbles… We are all Indians now.

          Unbalanced trade deprives you from the factories, employment, skills, infrastructure, market mechanisms, national independence, etc which are the real, real goods. Landfills ain’t it.

        3. Psychoanalystus

          Don’t blame this on China. Blame it on greedy, corrupt, nationless corporations like Apple, on a bankrupt political system, and on an ignorant nation as a whole.

          And, by the way, the jobs aren’t coming back to the US ever. The American workers are too illiterate, too unable to think critically, and the American education too backward and unaffordable to ever make the US competitive again.

          America is one declining hell hole. It’s already in the Dark Ages. Get used to it. Or better yet, move out.

          1. votersway

            We don’t blame it on China, we blame it on a corrupt government policy – unbalanced trade. Dorgan and Feingold tried to pass a bill against it but no one else supported them.

            I disagree with you your “advice” too – “Get used to it?” is suicidal but suicide is a horrendous sin. Around here we don’t cure disease with suicide, we seek cures.

            The cure is simple – balanced trade – import certificates, scaled tariffs, anything would do – they all lead to balance, at which point there are no tariffs and the trade is free.

            Organize, educate, talk to people, influence elections – that’s what democracy is for. It’s NOT for giving up. Apparently, you are unfamiliar with it.

          2. different clue

            Do you have investments in China? It sounds like you are “talking your book”.

            And your views on American workers sound like the views of any EuroTrash Intellectual Snob. Have such snobs admitted you into their precious company? Do you think that they might if you but try hard enough?

        4. different clue

          No, F. Beard. It is a consequence of Free Trade, not our Money System. We had the same Money System in place beFORE the passage of MFN for China as after it . . . and we didn’t have the same level of massive job loss until AFter the passage of MFN for China. Same Money System, different Trade Regime.

  6. votersway

    It didn’t sink and it hasn’t resurfaced – it keeps sinking. Financial panic notwithstanding, the real goods are the production facilities and they keep moving out. The pretend sinking is nothing compared to the real one which is coming.

    When the consumer goods are produced and imported from some place offshore, the factories, roads, distribution networks, etc move to that place. So the capital, the real, real goods move in a direction opposite to consumer goods.

    For example Apple have recently said that they can’t produce in the US anymore, because all production infrastructure has moved to China and disappeared from the US. The trick is that Apple fomented that process by starting production in China well before “all infrastructure” had moved there. Of course, they are not alone – the whole thing is driven by regulation.

    1. Neo-Realist

      Apple would not want to produce in the US since finding workers who would live in dorms and get up at a moments notice to work around the clock for peanuts would be hard to find. We’d rather live in our own homes to work for peanuts.

      1. Psychoanalystus

        “We’d rather live in our own homes to work for peanuts.”

        Add to that: “and commute 100 miles each way in a gas-guzzling SUV” between suburban homes and peanuts-paying workplace.

        1. votersway

          The truth is that unbalanced trade acts as a brake on progress, and forces a dehumanizing race to the bottom.

          Instead of technological advancements we get long work hours and low compensations. That’s a rotten way to “efficiency”. Is that the purpose of the economy or civilization for that matter?

          For everyone who thinks that it is, try moving to China and let’s talk again a month after that.

          BTW, energy is solved problem. Energy starvation is a policy, it’s not a natural phenomenon.

    2. different clue

      It is not driven by regulation. It is driven by Free Trade. If Free Trade were illegal with countries which have
      near-zero wages, anti-social anti-standards, anti-environmental anti-standards, etc.; the private biznazi elite could not mass-import material from the anti-standards anti-wages anti-social countries under the excuse of “driven to escape regulation”.

      During the NAFTA and WTO and etc. battles, the bicoastal Democratic officeholders tended to support the International Free Trade Conspiracy against America and the Midwestern and Southern Democratic officeholders tended to support America against the International Free Trade Conspirators. So a coalition of Republicans and Wall Street BillClintonite Rubinite scum got Free Trade passed.
      So now Chinese pollution is drifting across the blue Pacific over to America’s “left coast”? Well, I hope it all settles out over the Congressional Districts whose Congressfolk voted for NAFTA and WTO and MFN for China. They (and the people who elect them) would be getting the Mercury Fallout and the Global Warming Superstorms and the etc. which they eagerly voted for

  7. Psychoanalystus

    Spain is toast. I was there the other day. The place is a hopeless hell hole. Best thing they can do is bring back somebody like Franco to stand up to that Angela Merkel Nazi dominatrix dike.

    1. Maju

      Are you crazy? That’s a very bad idea!

      Franco’s dictatorship was horrible for all but a handful of national-bourgeois or aristocrats, leaving injuries that won’t heal in many generations. And, besides, this false democracy we suffer is nothing but Franco’s legacy. ‘I leave all tied and well tied’ he said… and so it is, with a mere Reaganist twist: his adopted heir rules as king, the sons of his minions rule as ministers, the military and police, never mind tithes for the Catholic Church, get not a single scratch from the cuts…

      We live neo-Francoism, what Spain really needs is to overcome that and move forward beyond Capitalism. However that’s a path best walked together with other fellow Europeans.

  8. Anon


    The central question:

    The central question, obscured by all the hand wringing and crocodile tears is simply this: Why should public citizens who have no stake in private enterprises, who received no profits or dividends, who had nothing to do with creating losses, be forced to pay for private losses? The only legitimate answer is, “They shouldn’t.” Anything that does not acknowledge this tenet is not functioning capitalism, and if it is functioning capitalism it cannot violate this tenet.

    Yet we witness apologist expert after expert excusing this fatal breach in capital practice as “regrettable but necessary to save the system.” They seem not to have noticed that the system has already killed itself by violating its own foundational laws and principles. If anything, current conventional practice might be accurately described as an all-out anti-capitalist assault on democratic free enterprise.

    Zeus Yiamouyiannis’s comment on the coming Greek default

  9. Tom

    First — the main problem has been the post-WW II build up in gov’t debt, that is, too much unsustainable gov’t spending.
    Consumption spending to political friends, crony capitalism, far more than actual investment in roads and effective infrastructure (altho a good amount of that was there, too).

    Increasingly, voters are voting for even more over-spending (UNSUSTAINABLE) politicians, who are promissing to solve personal problems with gov’t/public money.

    Second — with 7 billion people, most Europeans and Americans are in the “rich” top 2 billion. But out of envy over the super rich, they want more (gov’t?) benefits that they don’t pay for. There’s no morality that can say taking from the super rich to give to rich is moral, while stopping trade with the real poor is not immoral. More than half the people in China and India are in the not rich 4 billions — free trade helps them. By letting the poor have lots more jobs, which would otherwise be done by the rich.

    Free trade helps reduce global poverty the best. (China and India suffer, a LOT, from their own crony-capitalists with gov’t benefits.)

    Third — The Germans should leave the euro, so that the ECB could print money and allow the poorer countries to pay off their contractual debts with devalued euros.

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