Europe’s leaders chase their tails

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At times I get very optimistic about Europe and manage to convince myself that maybe, just somehow, the Euro-elite will work it all out and manage to pull Europe through. Then I remember who is at the helm and realise I am dreaming.

Wind your minds back to August 29th and the European parliament economic committee meeting:

A fresh round of capitalisation for European banks was firmly ruled out by EU officials and bankers when they appeared before an emergency meeting of the European Parliament’s economic committee.

The officials poured cold water on calls from Christine Lagarde, head of the International Monetary Fund for “mandatory” recapitalisation to avoid another financial crisis but acknowledged that the EU economy was continuing to weaken.

Jean-Claude Trichet, president of the European Central Bank, said there was no shortage of liquidity in the European banking system. EU economic commissioner Olli Rehn insisted that the health of EU banks had improved over the last year.

Mr Trichet declared: “There is no liquidity or collateral shortage for the European banking system.”

That was just 42 days ago. This is now:

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At least 66 of Europe’s biggest banks would fail a revised European Union stress test and need to raise about 220 billion euros ($302.3 billion) of capital, Credit Suisse AG analysts said.

Royal Bank of Scotland Group Plc (RBS), Deutsche Bank AG and BNP Paribas (BNP) SA would need the most, a combined total of about 47 billion euros, analysts led by Carla Antunes-Silva wrote in a note to clients today. Societe Generale (GLE) SA and Barclays Plc (BARC) would each need about 13 billion euros of fresh capital.

Eight banks out of the 90 tested failed the European Banking Authority’s July 15 stress test, with a combined capital shortfall of 2.5 billion euros.

But it isn’t just the supra-European institution members who seem completely out of their depth. National bankers have demonstrated throughout this crisis that they simply don’t understand the issues and continue to enact policy that is self defeating. We heard this again yesterday from Italy:

We must act fast. The sorts of interest rate rises seen over the last three months, if protracted, could lead to an uncontrollable spiral,” said Mario Draghi, who takes over as head of the European Central Bank next month.

Mr Draghi said austerity measures must be enacted “immediately” and warned that Italy’s €54bn austerity package is “not enough”.

Yields on 10-year Italian bonds surged above the danger level of 6pc in August on recession fears. Intervention by the ECB saved the day but yields have been creeping back up again as the ECB steps back. Yields rose to 5.71pc yesterday. Germany’s Bundesbank is adamantly opposed to further ECB bond purchases.

Mr Draghi hinted that ECB help is nearing its political limits, evoking Italy’s “atavistic temptation” of waiting for an army to cross the Alps to sort out its problems. “It is not going to happen. All our citizens must be are aware of this. It would be a tragic illusion to think that the help will come from outside,” he said.

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Greece is clear proof that austerity is not going to help a country like Italy I have no idea why anyone would still be arguing otherwise.

There was actually some good news out of Europe last night. Firstly Slovakia finally ratified the July 21 changes to the EFSF even though we now know the banks need most, if not all, of it. However, there was also some positive figures out of the real economy:

Industrial production across the 17 countries that share the euro increased at an unexpectedly strong pace in August.

The increase is partly a result of big output increases in Ireland and Portugal, two countries that received bailouts from the European Union and the International Monetary Fund.

Euro-zone industrial production rose 1.2% from a month earlier and was up 5.3% from a year earlier, European Union statistics agency Eurostat said Wednesday, the second straight month to show gains. Economists last week had forecast a 0.8% month-to-month decline and a 2.1% year-to-year gain.

The monthly increase in production was the largest since January, and the annual increase the largest since April.

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When I saw those numbers from Portugal I was very interested to dig a little deeper. I took a look at the Portuguese statistics site and built up a graph of Industrial production.

It turns out that production is still lower than 12 months ago, and the latest stats are just a monthly jump out of a terrible June and July. So maybe the news isn’t as good as it sounds, especially as Germany’s production actually fell over the same period, but at this point I’ll take anything positive from the European economy because I doubt I am going to get any from the people who are supposedly running it.