Europeans debate which deck chair to hang from

My base case for Europe as it attempts to implement its economic suicide pact has always been that the outcome would be far worse than promised. I’ve stated the meme many times previously:

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

Overnight we once again saw Markit Economic’s purchasing manager index (PMI) survey results and a description of “horrible” given by a number of market economists isn’t too far off the mark. Obviously I would also add the term “expected”:

French Flash PMI

  • Flash France Composite Output Index(1) drops to 44.7 (45.9 in April), 37-month low
  • Flash France Services Activity Index(2) unchanged at 45.2
  • Flash France Manufacturing PMI(3) falls to 44.4 (46.9 in April), 36-month low
  • Flash France Manufacturing Output Index(4) declines to 43.6 (47.5 in April), 36-month low

Latest Flash PMI data signalled that the decline in French private sector output accelerated further in May. The Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, registered 44.7, down from 45.9 in the previous month, its lowest reading since April 2009.

Marked declines in activity were recorded in both the manufacturing and service sectors during May. In the former, output decreased at the fastest pace in three years, while in the latter the rate of contraction was unchanged from April’s substantial pace.

Lower activity reflected a further marked reduction in new business during May. The latest drop in new work was at a rate broadly unchanged from April’s three-year record.

Employment also decreased at a faster pace in May, with the latest drop the sharpest for over two years. Job shedding was broad-based across both sectors, with manufacturers indicating the steeper decline in payroll numbers.

German Flash PMI 

  • Flash Germany Composite Output Index(1) at 49.6 (50.5 in April), 6-month low.
  • Flash Germany Services Activity Index(2) at 52.2 (52.2 in April), unchanged.
  • Flash Germany Manufacturing PMI(3) at 45.0 (46.2 in April), 35-month low.
  • Flash Germany Manufacturing Output Index(4) at 44.6 (47.3 in April), 35-month low.

May data pointed to a reduction in German private sector output for the first time in six months. At 49.6, down from 50.5 in April, the seasonally adjusted Markit Flash Germany Composite Output Index posted below the 50.0 no-change value for only the second time since July 2009. The latest reading signalled a marginal overall fall in business activity, with moderate service sector growth insufficient to fully offset an accelerated decline in manufacturing production.

Manufacturers in Germany pointed to a drop in output for the second month running, and the rate of reduction was the steepest since June 2009. Service sector activity meanwhile rose for the eighth successive month, with the pace of expansion unchanged since April but moderate in the context of the long-run series history.

Manufacturers also continued to fare much worse than service providers in terms of new business trends. The former saw a steep fall in new work that was the fastest for six months, while service sector companies reported only a marginal drop in new business intakes during May.

Measured overall, latest data pointed to a decrease in new work at German private sector firms for the third consecutive month, and the sharpest rate of decline since November 2011. In the manufacturing sector, new export orders fell at an accelerated pace in May, thereby extending the current period of contraction to 11 months.

EuroZone Flash PMI

  • Flash Eurozone PMI Composite Output Index(1) at 45.9 (46.7 in April). 35-month low.
  • Flash Eurozone Services PMI Activity Index(2) at 46.5 (46.9 in April). 7-month low.
  • Flash Eurozone Manufacturing PMI (3) at 45.0 (45.9 in April). 35-month low.
  • Flash Eurozone Manufacturing PMI Output Index(4) at 44.7 (46.1 in April). 35-month low.

The Markit Eurozone PMI® Composite Output Index fell to a near three-year low in May, according to the preliminary ‘flash’ reading which is based on around 85% of usual monthly replies. The index fell for the fourth month in a row to 45.9, down from 46.7 in April, to signal the fastest rate of decline of private sector economic activity since June 2009. Output has fallen eight times in the past nine months.

Activity fell at the fastest rates for seven months in services (and the second-fastest in 34 months), while manufacturing production dropped at the steepest rate since June 2009. The goods- producing sector posted the stronger overall rate of contraction.

By country, Germany posted a marginal fall in combined manufacturing and services output, the first such contraction since last November and only the second in 34 months. The rate of decline in France accelerated to the fastest since April 2009. In the rest of the Eurozone the pace of contraction remained severe, and was the fastest since June 2009.

Incoming new business in the Eurozone private sector declined for the tenth successive month in May. Moreover, the pace of contraction was the fastest over this sequence, and the strongest since June 2009. Manufacturers continued to post a steeper drop in new orders than their service sector counterparts. France posted a steeper drop in new business than Germany, while the rest of the Eurozone continued to see a stronger average rate of decline than the ‘big-two’.

Private sector employment in the Eurozone declined for the fifth successive month in May. The rate of job shedding was close to April’s 26-month record, but modest overall. This reflected a return to workforce growth in Germany, albeit at a marginal rate. Jobs were cut for the third month running in France, and for the twelfth consecutive month outside the ‘big-two’ on average.

The other recent news out of Euro-land was the first summit-like meeting with the new French President, Francois Hollande, attending. By most accounts it was much like summits from early 2011 with Euro-bonds the main topic:

“We had a not unheated discussion on euro bonds,” Luxembourg Prime Minister Jean-Claude Juncker told reporters in Brussels early today after six hours of talks. Joint borrowing “didn’t find much support, particularly in the German speaking area, but found a certain enthusiasm in the French speaking area.”


Euro bonds served as a lightning rod, with AAA rated countries such as Germany and Finland saying that joint borrowing would force up their own interest rates and give deficit-prone states an incentive to go on spending.

Germany has “huge difficulties” with euro bonds, Chancellor Angela Merkel said. On his ninth day in office and at his first European summit, Hollande backed the idea in a demonstration that the leaders of Germany and France are no longer on the same page in managing the crisis.

“Some countries are totally hostile, some can imagine them in the future, some can imagine doing them much more quickly,” Hollande said. “I was not alone.”

Once again there were some high level statements of agreement on the commitment to supporting growth, investment and jobs along with support for Greece to stay in the Euro,  but certainly nothing you could call a real agreement. The European Investment Bank has been given the task of drawing up proposals for growth in time for another summit in June where they can all argue over what to do yet again.

There have been some additional post-meeting statements from Mario Monti who suggested that the support for Euro-bonds was broader than thought, but as far as I can tell from statements by others this is simply wishful thinking at this stage.

And yes, in case you’re wondering, it does feel like 2011 all over again to me as well. Political squabbling while the economy lurches towards crisis.

That just appears to be the European way.


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    • I can’t see it happening then as it is before the election, so the current government doesn’t have a mandate to do anything.

      On the other hand, I’m making that call based on Australian experience, where politicians stick to conventions (most of the time).

      • thats right NW. the current government is in caretaker mode. they have no authorty to pass laws.

  1. The reluctance from Finland is understandable in my biased opinion.
    If the end game turned out to be “lights out” in Finland down the track with no one in sight to offer a bailout, the population would freeze to death. Having said that, I do not like the current situation and the strangling forces of austerity on the south any better.
    That is why I believe the only way to offer a decent future for the next generation of Europeans is a gradual controlled (ha- wishful here!) disintegration of the Eurozone, while doing everything possible to maintain trade partnership, workforce mobility and collaboration of countries within Europe.
    This doesn’t make me any less pro European. Just less naive.
    It occurred to me last week that maybe it is at least partly the cold climate that has pushed nordic welfare states (as they are called here) towards embracing equal opportunity and the level of solidarity so unnatural to the human nature in general. They’ve taken it too far IMO but the older I get the more I understand the benefits of it. I know a few professors who would have had lucrative careers in the US but chose to go back to Finland due to the better life for them and their children. One of them -my former boss- used to describe himself as a happy taxpayer. I cringed. Now that I’ve got kids I understand his thinking a lot better.

    • Actually, the only way to offer the next generation of Europeans a decent future is to get them out of Europe (just like in the 50s and 60s after WW2).

      • Wow, you’re even more pessimistic than I am and I thought I’m pretty gloomy.
        It does seem like there is no easy way out and whatever they do, a difficult decade lies ahead.
        There are so many problematic issues that it is very difficult to believe in successful integration or in a successful disintegration but we shall see. The scale of the problems is so large it is hard to comprehend it all.
        I have a deep distrust and repulsion towards corruption and that is one of the reasons why I remain so gloomy and suspicious of shared debts but I hate it when people label Euro sceptics as anti European.

  2. Alan Hingston

    What if Germany withdrew from the Euro currency?

    The Euro would then weaken, stimulating the tourism and retail sector with immediate impact on entry level jobs.

    France under Hollande could lead the charge for Eurobonds allowing Germany not to participate in soverign risk. This would provide further stimulus in the medium term. Also political pressure not to rely on Germany’s credit worthiness could force some innovative thinking.

    Germany as a collective enterprise has proven capability beyond its neighbours. It could then use its strong currency, know how and enterprise capabilities to drive productive investment in Euro currency economies.

    Germany’s economic future depends on not sinking with its failing neighbours.

    Perhaps Euroland’s future hinges on German initiative?

  3. “Political squabbling while the economy lurches towards crisis.

    That just appears to be the European way.”

    When you get so many heads of state trying to achieve the unachievable, this is what it looks like. The European experiment wss always going to fail, although Niall Ferguson has an interesting take on what comes next. He’s convinced that Germany will blink and Eurobonds will be issued in the end (his piece is called “One Nation (under Germany)” – sorry – no links)and goes on to say that there will be fiscal union simply because the alternative is too awful to contemplate ie. a breakup. He may well be right in that, but trying to get Germany’s voters to agree is quite another matter.People don’t always respond to crises in a logical manner and history is littered with examples. Electing a paranoid guttersnipe (Hitler) is just one.

    • We’re going to see a lot of Hitleresque / Stalinesque guttersnipes elected before this is over.
      That’s the penultimate step in the game.
      The ultimate step then follows sure as day!

    • Why would there be wars?
      How do you print your way out of this level of debt? I fear wars with that road map.
      How about allowing devaluations and improved competitiveness to the countries / north-south blocks with some sort of a debt jubilee attached?

      • Goldilocks

        The devaluers miss the inflation that is going to happen on that road. So inflation will start and it will not be killed. This results in very high inflation which if not attacked will rsult in hyper-inflation.

        Any attempt to stop the inflation will result in depression. The outcome, in the end, is the same dictatorships and war.

        The only possible solutions lie within us. We must accept much lower living standards and hardship spread evenly across our societies. We know that ‘ain’t gonna happen’!

  4. Thanks flawse.

    Which is better, a few countries inflating but at least able to decide for themselves what to do, or a whole block inflating to ruin together, with each country losing power to interfere?
    I don’t seem to be able to understand how it is possible to inflate these debts away. It would probably be best to stop reading and worrying, as there is nothing one can do anyway.

  5. Shall we open a book on how many more unproductive summits there will be before the end of the year? 🙂