Europe fiddles

Day one of the EU summit and while the talkfest begins the rest of Europe continues on its downwards path:

Economic confidence in the euro area slumped to the lowest in more than 2 1/2 years in June, suggesting the economic slump deepened in the second quarter as officials struggled to contain the sovereign-debt crisis.

An index of executive and consumer sentiment in the 17- nation euro area dropped to 89.9 from a revised 90.5 in May, the European Commission in Brussels said today. That’s the lowest since October 2009. Economists had forecast a drop to 89.6, the median of 27 estimates in a Bloomberg News survey showed.

The big news overnight was the confirmation that, on top of the latest PMIs , Germany’s economy is starting to show signs of weakening from the crisis:
The number of people out of work in Germany rose by 7,000 in June to give a jobless rate of 6.8% of the workforce, according to official figures. The German Employment Agency’s figures recorded the third consecutive monthly increase.
However, the relatively modest rise left the percentage of the workforce without a job unchanged. The actual number out of work in June was 2.882 million, from an upwardly revised 2.875 million in May.

There was also some bad news from Italy and, although it maybe a little one-sided and suspiciously timed, given recent data may not be too far off the mark:

Italy has fallen into an economic “abyss”, employers’ lobby Confindustria said on Thursday, slashing its growth outlook for the euro zone’s third largest economy and projecting big overshoots of its deficit targets.

The dire economic outlook underscores the pressure on Prime Minister Mario Monti to bring home more pro-growth policies and a mechanism to limit soaring borrowing costs from a European Union summit in Brussels that starts later on Thursday.

Confindustria estimated the economy would contract by 2.4 percent in 2012, compared with a December forecast for a 1.6 percent fall. Gross domestic product would fall 0.3 percent next year, compared with a previously forecast 0.6 percent increase.

Italian funding costs rose again with a successful auction of 5 and 10 year bonds taking yields higher. Italy issued €5.42bn with 10yrs at  6.19%, up from 6.03% on May 30 and 5yrs at 5.84%, up from 5.66% a month ago. Spanish 10yrs also hit over 7% again pre-summit but have fallen back a little.

Markit Economics also released some retail sales data which showed some resilience but the downward trend is still very obvious:

EuroZone Retail PMI

Eurozone retail sales fall at slower pace in June

  • Revenues down for eighth month running, but rate of decline eases sharply
  • Purchases of goods for resale fall at second- fastest rate in survey history
  • Wholesale price inflation stabilises at weak rate

Summary of June findings:

The Eurozone retail sector remained in contraction mid-way through 2012, according to PMI® data from Markit. Sales fell on a month-on-month basis for the eighth successive month – the third-longest sequence in the survey history – and purchases of new goods by retailers declined at the second- fastest pace on record. That said, the rate of decline in sales slowed sharply during the month.

The Eurozone Retail PMI is an indicator of changes in the value of sales at retailers. The PMI is adjusted for seasonal factors, and any figure greater than 50.0 signals growth compared with one month earlier. The series started in January 2004.

Having registered its second-lowest level on record in April (41.3), the PMI recovered further ground in June to post 48.3. The latest figure signalled that retail sales fell at only a modest rate, following sharp falls in April and May.

The summit itself has been fairly uneventful and most of the coverage has spent more time discussing the soccer. Probably the most interesting/important thing to happen so far is some action from the Euro working group. The group has convened on the sidelines to discuss the if/how/when something can be done about Italian and Spanish yields. The major point of discussion is a proposal from the Finns to use a type of covered bond backed by taxation revenue , assets and/or equity in order to bring down yields. The proposal also suggests back-stopping auctions with the European stability mechanisms in order to set a floor:

Euro zone officials are discussing a Finnish proposal for Spain and Italy to issue covered bonds to make their debt issues more attractive and to allow the euro zone’s permanent bailout fund to bid at primary auctions of the two countries, euro zone officials said on Thursday.

The aim of the discussions in the Eurogroup Working Group of deputy finance ministers and treasury officials is to find a way to lower financing costs for the two sovereigns that European Union leaders meeting in Brussels could discuss later.

“The EWG is discussing the Finnish proposal on covered bonds and their role in primary market support for Spain and Italy,” one euro zone official said.

“The objective is to get the technical work done so that the leaders can look at it later tonight,”

It isn’t a bad proposal within the framework of the Euro, and it is something that the Finns used themselves in the 90s while the country was in recession in order to bring down borrowing costs. The stumbling block is obviously the idea of using the EFSF/ESM to support auctions which is likely to be seen as direct funding to nations. I expect this part of the proposal to be blocked, but the collateralised bonds may get some legs. We’ll have to wait and see how the fairly dysfunctional group of leaders welcomes the idea.

For the rest of the summit, unfortunately the draft conclusions (available below , and yes they are already out ) contains nothing much else of substance outside of what we already know about the growth pact. In fact, if you read closely, nothing much has changed at all:

(a ) pursuing differentiated growth-friendly fiscal consolidation, respecting the Stability and Growth Pact and taking into account country-specific circumstances; particular attention must be given to investment into future-oriented areas directly related to the economy’s growth potential and ensuring the sustainability of pension systems. The Commission is monitoring the impact of tight budget constraints on growth enhancing public expenditure and on public investment. It will report on the quality of public spending and give guidance on the scope for possible action within the boundaries of the EU and national fiscal frameworks.

Growth friendly fiscal consolidation? I guess they’ll never let it go.

The summit’s agenda suggests we should see statements and/or decisions on proposals for:

  • Direct recapitalisation of banks by the emergency mechanisms
  • The extension of the ESM to include a Banking licence
  • Adjustments to ESM seniority for Spanish Banks
  • Banking supervision by the ECB of systemically important banks
  • Peripheral yield controls
  • The growth pact
  • A banking Union
  • Supra-European bonds.
I think we know the answers to most of these already, but we still have a whole other day ahead.

19thEUSummit Draft Conclusions

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    • One other thing, is the ECB looking at the FED swap expiry on Feb 1st 2013? I assume it will be re-instated, but ??