Europe Has No Levers for Growth

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.

It’s the eve of the 19th EU summit and as I type Angela Merkel and Francois Hollande should be getting started on their pre-summit meeting. I don’t think there is doubt in anyone’s mind that although we have seen 18 before it, this summit is of particular importance. Hollande and Merkel had a few words to say before their meeting:

“Many are looking to Europe,” Hollande said: “We want to affirm its consistency, its strength, its unity and its solidarity.”

Merkel said the two-day EU summit starting in Brussels Thursday will be “of very great importance for the future of Europe.”

“The situation is serious and we have an obligation to build a strong and stable future Europe,” she said.

“Significant progress has already been made regarding the growth pact,” she said, referring to a plan to invest up to 130 billion euros ($162 billion) in kickstarting eurozone economic growth.

“I hope it can be adopted tomorrow,” Merkel said.

“We need more Europe, we need a Europe that works, the markets are expecting this, and we need a Europe whose members help each other,” she added.

Fine words, but it is actions that tell the truth and in that regard recent history tells a very different tale.

As I mentioned yesterday if the growth pact in its current form is the only thing to come out of the summit then I suspect the rest of the world will see it as a massive failure. Spiegel published an article yesterday crucifying the pact as nothing more than window dressing and an attempt to make it appear as if the summit actually achieved something:

Yet summit participants know themselves that the resolution is little more than a bit of window dressing for voters and financial markets. The pact contains nothing new, according to an internal analysis undertaken by one member state. It is only being agreed to, the analysis continues, so that the new French president can save face. During his presidential campaign, Hollande demanded efforts to stimulate the economy.

“It is all just old wine in new bottles,” agrees Daniel Gros, director of the Centre for European Policy Studies, a Brussels-based think tank. “Politicians just want to show that they are taking the desires of the electorate seriously.” But, he adds, the effect on the economy will be virtually nil.

In the meantime Spanish yields are creeping back up again which has lead Mariano Rajoy to issue a pre-summit warning that his country is in serious trouble without short-term resolution:

Spanish Prime Minister Mariano Rajoy has said Spain cannot afford to finance itself for long at current rates. Spanish 10-year government bonds have been trading at yields above 6.8%, coming close to the 7% considered unaffordable.

Mr Rajoy was speaking ahead of this week’s European Union (EU) summit.

“The most urgent subject is the subject of financing,” he said. Spain has asked for funding for its banks, but the country has not been bailed out.

I’m not sure why Rajoy insists on claiming a €100bn loan isn’t a bailout when it most obviously is. I suspect that it is because of the stigma attached to such a thing along with the conditions that come with it. The Spanish Prime Minister has been insisting for weeks that, in terms of the sovereign, this is free money but that is completely untrue at this stage. If you have any doubts on that you only need to read the statement from the Eurogroup concerning the matter:

The Fund for Orderly Bank Restructuring (FROB), acting as an agent of the Spanish government, would receive the funds and channel them to the financial institutions concerned. The Spanish government will remain fully liable and will sign the Memorandum of Understanding and the Financial Assistance Facility Agreement.

The Eurogroup reiterates its confidence that Spain will honour its commitments under the Excessive Deficit Procedure, and with regard to structural reforms, with a view to correcting any macroeconomic imbalances as identified within the framework of the European semester. Progress in these areas will be closely and regularly reviewed in parallel with the financial assistance.

Spain will request technical assistance from the IMF, which will support the implementation and monitoring of the financial assistance with regular reporting.

Surely that is clear enough.

In the meantime it appears that the ECB is also becoming increasingly concerned about the expected lack of political action from the summit with the rumour that ZIRP, and possibly NIRP, is on the way:

European Central Bank President Mario Draghi is contemplating taking interest rates into a twilight zone shunned by the Federal Reserve.While cutting ECB rates may boost confidence, stimulate lending and foster growth, it could also involve reducing the bank’s deposit rate to zero or even lower. Once an obstacle for policy makers because it risks hurting the money markets they’re trying to revive, cutting the deposit rate from 0.25 percent is no longer a taboo, two euro-area central bank officials said on June 15.

The ECB uses three interest rates to steer borrowing costs in financial markets. The main refinancing rate determines how much banks pay for ECB loans, while the deposit and marginal rates provide a floor and ceiling for the interest banks charge each other overnight.

If the deposit rate was cut to zero or lower, it would discourage banks from parking excess liquidity with the ECB overnight, potentially prompting them to lend the cash instead. Almost 800 billion euros ($1 trillion) is being deposited with the ECB each day.

On the other hand, a deposit rate cut could hurt banks’ profitability by lowering money-market rates, potentially hampering credit supply to companies and households and reducing banks’ incentive to lend to other financial institutions.

Let’s be clear about this. The ECB’s own banking surveys clearly state that the lack of credit expansion is a demand side issue. Here is the statement on supply:

According to the April 2012 bank lending survey (BLS), the net tightening of credit standards by euro area banks declined substantially in the first quarter of 2012, both for loans to non-financial corporations (for which they declined to 9% in net terms, from 35% in the fourth quarter of 2011) and for loans to households (for loans for house purchase they fell to 17% from 29% in the fourth quarter of 2011 and for consumer credit to 5% from 13% in the fourth quarter of 2011). This drop was much more pronounced than anticipated by survey participants at the time of the previous survey round and mainly reflected milder pressures from cost of funds and balance sheet constraints, in particular as regards banks’ access to funding and their liquidity position.


Looking ahead to the second quarter of 2012, euro area banks expect a further decline in the net tightening in credit standards for loans to non-financial corporations (NFCs) (to 2% in the second quarter of 2012) and for housing loans (to 7% in the second quarter of 2012), and a broadly unchanged level of net tightening for consumer credit (6% for the second quarter of 2012).

And now demand:

Euro area banks reported a sizeable fall in the net demand for loans to NFCs in the first quarter of 2012 (-30%, from -5% in the fourth quarter of 2011). This brought net demand for such loans to a significantlylower level than had been expected in the fourth quarter of 2011, with the decline driven in particular by a further sharp drop in financing needs for fixed investment. Likewise, the net demand for loans to households declined further in the first quarter of 2012 (-43% from -27% in the fourth quarter of 2011 for loans for house purchase and -26% from -16% in the fourth quarter of 2011 for consumer credit), in line with the expectations reported in the previous survey round for housing loans and below the expectations reported for consumer credit.

This is classic balance-sheet recession behaviour. Many areas of Europe have seen a significant loss of private sector wealth caused by the GFC and associated asset price declines. In response to this the private sector has adjusted behaviour in an attempt to pay down debts because their asset to debt ratio has fallen so rapidly. In these regions lowering interest rates does not cause increased lending. In fact, if the US is any guide, it spurs de-leveraging because people take the opportunity to refinance at lower rates to pay down debt faster.

Households in struggling economies do not have the capacity to take on more debt and therefore business in those areas have no reason to invest in increased production because their will be no customers willing to purchase the goods. In order to create increased economic demand, and therefore national income, the private sectors balance sheet needs to be cleaned up first.

In a environment of stagnant or falling internal consumption in a near zero interest rate environment this can be achieved in three ways:

• an increase in economic activity caused by external demand
• lowering of the government burden on the private sector
• a write-off of the existing debts

On the first point, as you may have noticed from recent PMIs, external demand is falling. On the second point, we continue to see the opposite from national governments:

Spain’s government is studying tax increases to rein in the budget deficit, including scrapping a rebate for homeowners that Prime Minister Mariano Rajoy introduced six months ago to meet a campaign pledge.

The government needs to plug the deficit as data showed the central administration’s shortfall for the first five months approaching the full-year target and the Bank of Spain said the recession deepened in the second quarter. The government in Madrid may eliminate the tax rebate for mortgage holders and create environmental levies, Deputy Budget Minister Marta Fernandez Curras said yesterday.

On the third point, we continue to see Europe enact policy that ensures that banks never have to realise the costs of their poor lending decisions and the burden is shifted back onto the non-financial private sector. The Spanish bailout is yet another example.

So, in my humble opinion, Europe has become a mix of ineffectual monetary policy on top of misguided fiscal policy. The only thing that can possibly drag Europe out of its economic quagmire at this point is strong co-operative political will.

Need I say more?

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  1. Foppe

    I’m not sure why Rajoy insists on claiming a €100bn loan isn’t a bailout when it most obviously is. I suspect that it is because of the stigma attached to such a thing along with the conditions that come with it. The Spanish Prime Minister has been insisting for weeks that, in terms of the sovereign, this is free money but that is completely untrue at this stage.

    It seems to me important to remember that it was Rajoy’s party that made it impossible for the previous government to take any actions at all to combat the crisis, in order to make that party seem inept. (Much like the Rs do in the USA.) Which worked.
    As for your question about why he is lying about the bailout being a bailout: Our (Dutch) PM is doing the same thing — insisting that power transfers to Brussels aren’t really power transfers — and what is most notable about it is that he hardly gets challenged on those claims at all, especially not by the news media. This is a practice that has been going on ever since the signing of the Maastricht Treaty, and it still works: whenever the economic liberals claim that they are being forced to do something by ‘Brussels’, they are never asked what role they played in creating the rules that ‘Brussels’ is now ‘forcing’ upon us.

  2. Joe

    No need to say any more– but even _if_ we had more cooperation, can the current system be “saved”?

    Everyone wants to know, if more cooperation is possible? If tighter integration under Europe is desirable? But if the reason for this is to save Europe’s financial system, it might be worth considering– if this is at all possible, anyway? I mean, is it practically achievable? (Personally, I think the answer is, it’s not.)

    The whole crisis can be characterised by the ad-hoc nature of responding to problems as they arise.

    After 4 years, this cycle needs to be broken! Enough is enough.

  3. Hugh

    First, I should say there will be no solution because Europe has multiple problems, and none of them are really being addressed. Indeed it is rather the point that they not be tackled as this would interfere with the looting going on.

    Second, the author seems to have written off any Keynesian stimulus of demand, unless that falls under the heading of “external demand”. Debt write offs are a good idea. Lowering taxes is more problematic. Lower them on the 99% and increase them on the 1%. I would also say shift losses and costs on to the 1%. All of this with the caveat that none of this will happen because the elites in charge either are or work for the kleptocrats.

    1. proximity1

      …”it is rather the point that they not be tackled as this would interfere with the looting going on.”


      when the so-called “real-world” at last conforms to the models’ requirements, then, uh, why, uh, then—–

      time for more new problem-creating models which can be “solved” by further adjustments to the so-called “real-world.”

      Who knew economics was such “fun”!?!

      1. James

        time for more new problem-creating models which can be “solved” by further adjustments to the so-called “real-world.”

        Exactly as well. Unfortunately, the real world has a model or two of its own. And the real world being real and all… But the US, of course, is somehow “special.” I wonder what the real world is gonna have to say about that?

    2. Jim

      The primary “problem” is that Germans still consider themselves German, and Frenchmen consider themselves French. Just glance at the ratings for the current EuroSoccer tournament. Or the rights to broadcast the games of any national/local soccer teams.

      And why the “far sighted statesmen” who came up with the Euro thought that sovereignty doesn’t matter, well, that’s beyond me.

    3. jake chase

      The solution is transparently obvious- a bailout for the 99%. The crushing private sector debt is the problem, more loans to corrupt and inept governments not the solution. Business has no reason to borrow as demand continues to shrink. Chances are the Eurocrats will hold hands in a circle and summon the confidence fairy to save their bacon. Nothing so reinforces stupidity as faith in a bankrupt ideology. Their only agenda is saving the zombie banks, while the real economy simply implodes.

  4. polistra

    EU is the problem. Asking EU to solve the problem is like asking a shark to develop a new mechanism to solve the problem of human amputations by sharks. The shark will develop a program to insure that all humans spend their holidays swimming in the ocean with blood-flavored sunscreen.

    1. James

      The EU was always about something for nothing (I wonder where those silly Europeans got that idea from?). Member states could all bask in the unlimited gains made possible by economic “solidarity,” while still maintaining political and cultural autonomy at home. What’s not to love? I believe the BS/self-actualization term is “win-win.” What could possibly go wrong?

      Greer has a thing or two to say about the failure to properly assess the effects of individual changes on whole systems this week that seems applicable.

  5. Norman

    Ho hum, the Europeans haven’t seen any real cooperation with each other as far as the individual governments go, so there isn’t any reason to believe they will achieve any now. Until the whole banking system is overhauled, without the banks doing the overhauling, the world economy will stay in the present state of uproar.

  6. Jackrabbit

    Probably no real fix until capitulation (utter terror, rage, and despair)

    Then there will be a TINA (There Is No Alternative) solution.

    What does that look like? I have no crystal ball but I think when PIIS countries experience something similar to what Greece is going through now and France is in turmoil, then there will be real fear and calls for ANYTHING that will save Europe from the abyss.

    What we have now – for most – is inconvenience and consternation (especially among the unemployed) and a higher debt cost. There is still a belief that it’ll get fixed somehow so the will to game/loot the system is still (too) strong.


    As many many people have expressed on this blog and others. Talking to ordinary people about systemic problems is completely futile. It is clear that they have to experience it before they demand a solution. And at that point they are completely at the mercy of the TINA solution offered by TPTB.

  7. Bam_Man

    The 19th Euro summit.
    Surely this has been a boom time for high-end caterers.
    Everybody else, not so much.

  8. jsmith

    It’s quite beyond the pale by now that Western societies are allowing this playacting on the part of “our” political leaders to continue any longer.

    Oh, another summit, how placating!

    Write off the debts already or face revolution and/or war, you miserable POS!

    Those really are your choices, “leaders.”

    Stuff a sock in “growth this” and “growth that”, balancing budgets, GDP targets and all the other malarkey that comes out of the mouths of you and your minions, and start doing what needs to be done before it all really starts to spiral out of control.

    People are becoming sick and dying, countries are dissolving, the rule of law is completely disintegrating and all of this just because a handful of stodgy ahole bankers are telling the planet that illegal debts need be repaid.


    Again, we are allowing Western society to be destroyed not by:

    climate change
    an asteroid

    But over a bunch of imaginary numbers that some elite aholes cooked up and told us we have to chain ourselves to.


    1. James

      Well, they’re not calling it the virtual economy for nothing, I guess. Too bad so many of us won’t be merely virtually homeless, hungry, and pissed off in it’s aftermath.

    2. Susan the other

      Agree. And I would just say that Varoufakis makes a good point. The odious and ridiculously irrational and aggressively stupid demands of debt repayment should be held in moratorium until economies can prove themselves. If they cannot achieve the absurd growth figures, the debt should be written off and the banks and the bankers nationalized, or strictly utilitized.

  9. docG

    As far as European workers are concerned, growth and austerity are two sides of the same (counterfeit) coin. All “growth” means is less unemployment for underpaid, overworked workers. What’s needed is not more jobs but better jobs, that pay a living wage, which no one seems to care much about these days. Workers are being conned into accepting their enslavement as the only alternative to total economic collapse.

    “Unable to grasp the root cause of the crisis, the capitalists and their cronies are attempting to solve the problem by doing more of what they have always done: squeeze squeeze squeeze the working class, which presumably has no alternative but to blindly obey. This is true, by the way, not only for those demanding “austerity,” but also those pleading for “growth.” In either case, the burden will be on the backs of labor.” Mole in the Ground (see link above).

  10. James F Traynor

    I read a proposal in an NYT Oped yesterday or the day before that suggested that Germany withdraw from the Euro and back to the mark. The authors thought that this could save the Euro by reducing its value to the benefit of the debtor states. The downside would be an adverse effect on German industry but they thought this would be temporary and a reasonable way to save both the Euro and the European Union.

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