Monday, May 23, 2011

EMU takes a new hit; frazzled outlook

Main EMU sectors hit major air-pocket- The EMU MFG and Services indices are sharply lower. The MFG index fell by 2.9 points while the services index fell by 1.43 points. Those drops are huge in the histories of those respective series. For MFG the drop ranks as the fourth largest in the series’ history. For services the setback was the 14th largest. This ranking makes the MFG drop an event that occurs only about 2% of the time; the services drop is an event that occurs only about 10% of the time, a little more than one a year. The services sector last saw a drop larger than this is in September of 2010. Still it’s a large drop, but the MFG drop is enormous. MFG last fell by more last in November of 2008.

While we have seen the EMU metrics on growth show setbacks in recent months, the step-back this month is severe.

Level readings for sector as not a problem- Still at 54.85 the MFG index is still showing growth and is well above its average value of 51.62. Services at 55.40 also are still showing growth and are above their average mark as well. The dividing line between growth and contraction on this metric is 50 and both are well above that so it’s not a growth setback we worry about, at least not yet. The values still sit in the 79 percentile and the 69 percentile in the MFG and Services high-low ranges, respectively. These are still adequate-to-firm readings.

NO recession worries…yet - The levels of their headlines are not a problem at this time but the momentum of the sectors is an issue and the severity of the one-month drop is as well. Both indices still seem to be on the same growth plateau that they reached early in 2010. We have even seen somewhat similar losses of momentum in this recovery period and we have seen the sectors rebound from that weakness.

Escalated debt crisis worries? - But this time there are new factors in the mix. Europe’s debt problems are emerging again, this time a warning to Italy is in the mix. That is an escalation of the threat. A week ago the IMF warned that the debt problems in the Zone could spread from the periphery to the core. Is that now happening?

Euro-politics- Spain, a large EMU member country that has fought off further attacks after some rough spots early in the year has just had a big election set back. In Germany Angela Merkel, banker to the EMU-bailout schemes, lost support sharply in a small state election. The German electorate is not pleased with its role backstopping Europe. The economic situation remains difficult in Europe as the political situation becomes even more confused. In Italy Silvio Berlusconi has been under his own cloud of mistrust for some time, due his own sex scandal. In France Nicolas Sarkozy who was lagging in the polls now finds himself free of his most potent challenger due to a sex scandal involving the former IMF director who was to be his nemesis. Let’s not forget Finland whose new government is against any more bailouts in the Zone. Finland is one of only six AAA-rated sovereign states in the 17-nation euro zone

Can’t make this up- Quite honestly you can’t make this stuff up. If you look at the political map in Europe it is in chaos. The ECB itself is due for a changing of the guard later this year and it appears to have selected an Italian to follow in the footsteps of Trichet. Right now it’s looking like a tough time for transition.

Like Post WWI...again? All of this reminds me a lot of the financial strains that emerged in the wake of World War I. At that time Germany had lost the war and the reparations placed on its back were too heavy a load for it to bear but the victors wanted to make Germany pay. This time around, it’s not a war but a financial crisis and there has, one again, been misdeeds. This time it is the Germans with the financial muscle to help and yet they do not really want to. Then again if they do help, they want their pound of flesh from the Greeks and anyone else that has gone astray. This is one ‘safety net’ that you don’t want to fall into.

Muddles interests and a complex blame-game- Asking for too much penance to eliminate the risk of moral hazard can backfire and it has done so in the past. Will Europe wake in time to see the risks? Or are Europeans so set in getting revenge or in making those who strayed pay, that it will cut off their own nose to spite their face? This is a risk, a real risk. What makes this more of a muddle is that Germany is not simply being asked to be altruistic or to turn the other cheek to help out the already too cheeky. If euro-sovereign finances go sour en mass, it is the German, French and UK banks that will suffer the most. The Germans do have skin in the game and yes, it is their own. But in Germany this is not the way German financial involvement is being portrayed. That is probably because, like Americans, Germans get little satisfaction from a policy to take expensive steps to protect the interests of their own banks.

Get a CLUE! And so the Euro game will continue to play out like a giant game of Clue™. If EMU goes down, or is clobbered with debt and refinancing issues, who will be to blame? The Greeks, at home, in the overpriced Olympic stadium? The Germans in their beer garden by their unwillingness to help? The German bankers, with their troubled portfolios by the means of bad loans sprinkled everywhere? Who is your candidate for blame? How did they do it? Where was the ‘crime’ committed? It’s a fun game. Play it.

1 comment:


Service jobs do not pay high wages generally speaking.