Eurozone data stinks up again


The Cypriot drama is beginning to wane, but if you read the MoU you’ll understand that this story is far from over:

The economic adjustment programme will address short- and medium-term financial, fiscal and structural challenges facing Cyprus. The key programme objectives are:

  • to restore the soundness of the Cypriot banking sector by thoroughly restructuring, resolving and downsizing financial institutions, strengthening of supervision, addressing expected capital shortfall and improving liquidity management;
  • to continue the on-going process of fiscal consolidation in order to correct the excessive general government deficit, in particular through measures to reduce current primary expenditure, and maintain fiscal consolidation in the medium-term, in particular through measures to increase the efficiency of public spending within a medium-term budgetary framework, enhance revenue collection and improve the functioning of the public sector; and
  • to implement structural reforms to support competitiveness and sustainable and balanced growth, allowing for the unwinding of macroeconomic imbalances, in particular by reforming the wage indexation system and removing obstacles to the smooth functioning of services markets.

It all sounds very Greek to me. Although Cyprus has been granted an extra year to meet a 4% surplus, from a 2.4% deficit,  I have no doubt given the completely broken banking system, in which BoC unsecured debt holders are now rumoured to take a 60% haircut, that the country’s economy will report heavily on the downside for many years to come. The MoU reads much like a standard IMF wish list in which internal deflation is expected to reap reward, but as we have seen from other struggling Eurozone nations in most cases this is an economic mirage. Russia has also announced it will not be providing support to depositors who have lost money under the Cypriot bailout, which I can only assume will greater dampen any remaining confidence in the Cypriot banking system.

Of note, however, is that it isn’t just Cypriot depositors taking a bath in Europe. As I mentioned back in July last year, Spanish banks did their best at entrapping deposit holders via the use of under-regulated security offerings promising high yield to unwitting members of the Spanish public. That now also has come home to roost:

CYPRIOT depositors are not the only ones suffering the aftermath of a banking bust. People who bought shares or subordinated debt in Spain’s dodgiest cajas, or savings banks, have either been all but wiped out or forced to take hefty losses. Many small Spanish investors are among them.

Four months after Spain requested a €40 billion ($51 billion) chunk of its banking bail-out funds from its euro-zone partners, on March 22nd it delivered the blow that hundreds of thousands of retail investors feared. The FROB, Spain’s restructuring fund, imposed haircuts of up to 61% as it turned junior debt and preference shares in four nationalised banks—Bankia, Catalunya Banc, Banco Gallego and NCG Banco—into equity.

This week the Spanish government also finally announced its downgrade of its economy, bringing it somewhat in-line with its own central bank, as yet another political scandal rocks the country.

Overnight was also another round of  manufacturing PMI data and there wasn’t any good news in it. Germany manufacturing hit a 3 month low, French data continues to worsen,  Spain is accelerating downwards, as is Greece,  The Netherlands is getting weaker and even Ireland took a dive in March:


Comments from Markit Economics wrap the dour data well:

The Eurozone manufacturing sector looks likely to have acted as a drag on the economy in the first quarter, with an acceleration in the rate of decline in March raising the risk that the downturn may also intensify in the second quarter.

The surveys paint a very disappointing picture across the region, with all countries either seeing sharper rates of decline or – in the cases of Germany and Ireland – sliding back into contraction.

Companies reported that signs of stronger demand from markets such as Asia and the US were countered by a renewed weakening of demand within the euro area, in turn reflecting deteriorating business and consumer confidence.

While in some respects it is reassuring to see that the events in Cyprus did not cause an immediate impact on business activity, with the final survey results even coming in slightly higher than the flash estimate, the concern is that the latest chapter in the region’s crisis will have hit demand further in April.

So, like much like the other PMI data, the beginning of 2013 continues to show economic weakness in the region. As expected this is showing up in the unemployment figures which once again reached a new record in February:

The euro area (EA17) seasonally-adjusted unemployment rate was 12.0% in February 2013, stable compared with January. The EU27 unemployment rate was 10.9%, up from 10.8% in the previous month. In both zones, rates have risen markedly compared with February 2012, when they were 10.9% and 10.2% respectively. These figures are published by Eurostat, the statistical office of the European Union

Eurostat estimates that 26.338 million men and women in the EU27, of whom 19.071 million were in the euro area, were unemployed in February 2013. Compared with January 2013, the number of persons unemployed increased by 76 000 in the EU27 and by 33 000 in the euro area. Compared with February 2012, unemployment rose by 1.805 million in the EU27 and by 1.775 million in the euro area.


In short, Cyprus maybe out of the way in the short-term, but you the smell emanating from the EZ economy is growing again.

Full Europe PMI Report below.

Euro PMI March 2013

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  1. Re manufacturing sector decline.

    The deep distortions in our economies caused by decades of artificially low interest rates and profligacy may be even worse than I had envisioned and i guess I’m about the biggest bear around here.

    It would be interesting to look at sectors within manufacturing. Even our manufacturing has, over decades, been distorted by the false economic signals. If much of our manufacturing is directed towards making goods for the FIRE economy then the manufacturing sector is going to go with the unsustainable FIRE economy.
    It looks like we are all importing much of the stuff we use for everyday life and manufacturing stuff that is mostly demanded as a result of decades of cheap and expanding credit.

    I must admit i had previously been thinking that manufacturing would provide some sort of fall back…but even there we are obviously making the wrong stuff!

    Clearly we have distorted economies with Service sectors that are too large relative to manufacturing. Now we seem to have distorted even our manufacturing. We consume too much and FIRE sectors dominate. As I’ve opined our education systems and social systems are distorted as are individual expectations.

    This is not good for me!

    • It’s unsurprising that the distortions are worse than you could have imagined, F, because you don’t have the full facts in front of you! The EU ‘leaders’ do, and they see no other way out other than debt reduction, higher unemployment and social economic pain. If that’s the best they can see, (and they’ve probably still got their rosy glasses on, as well!) imagine what your eyes would make of the true figures!

      • The EU have no other way out because they don’t control their individual currencies so can’t “print”, increase inflation and devalue the currency. Their only other option of leaving the EMZ and issuing and devaluing their own currencies and defaulting on their sovereign debt is now almost as bad as the internal adjustment imposed by remaining in the EMZ and tolerating the imposed austerity.

        Europe and countries that borrow in foreign currencies have their own additional problems over sovereign nations that are also sovereign in the currency their country and citizens use and almost only borrow in their own currency.

        With respect I suggest some reading on fiat currencies in a floating exchange rate environment versus a gold standard, currency union or fixed exchange rate system like Bretton Woods.

  2. If you look at the three objectives vis Cyprus you have

    ‘to restore the soundness of the Cypriot banking sector by thoroughly restructuring, resolving and downsizing financial institutions,’

    ….Making the Cyprus financial sector (8 times GDP in 1Q13) far far smaller. Providing a one-off chance to harness the assets of a sector 8 times GDP currently to lay the basis for the future.

    ‘to continue the on-going process of fiscal consolidation in order to correct the excessive general government deficit,’

    …..To shrink government outlays to a smaller budget (against the backdrop of an economic sector 8 times the size of national GDP being kicked into touch)

    ‘to implement structural reforms to support competitiveness and sustainable and balanced growth, allowing for the unwinding of macroeconomic imbalances,’

    … encourage some form of economic growth from the wreckage (given that the currency and monetary policy will remain as it is)

    We are talking about Cyprus returning to goats and olives, and competing in the sun drenched beaches market with Turkey Spain Italy etc.

    That for sure will be weighing on the minds of the public and depositors elsewhere.

    That PMI data from yesterday would presumably be in the minds of everywhere from Slovenia or Hungary (arguably needing bailouts real soon) to the usual suspects on Spain or Italy (with Italy looking as though it may still need to go to the polls again) and beyond to places like Luxemburg ( a far larger money haven than Cyprus). May 1 usually marks the start of the summer protest season in Europe. I could not conceive of us not seeing far more protest this year.

    The summer months are usually when the body politic of the EU states tends to be more alert to ideas about growing the economy (as opposed to shrinking them to deal with fiscal/financial system issues).

    Now also on Cyprus is the view that what has happened there may well be challenge-able on legal grounds.

    This view is out today from one of the largest Moscow firms about Russian depositors in Cyprus.

    The implicit threat could be that an individual (if not a state) – presumably one unenthused about the discrimination between depositors with more/less than 100K EUR (or anything similar tried elsewhere) – would try a legal action which dragged on and ended up in the European Court of Human Rights.

    Russia is looking like it is prepared to see its depositors in Cyprus get a trimming – it suits domestic politics in Russia as a lot of Russian politicians have been telling punters to get their money back to Russia for some time – and the risks for those with money in other states is being openly discussed in Russian media. But one would imagine that would not always be a happy position and the large deposits of Russian state companies in Cyprus may become an issue for some leverage.

    Anyone looking for a property bargain would do well to look through Russian sites selling Cyprus real estate.

    At the moment in the EU there arguably isnt a political narrative that is coherent about trying to generate some economic growth. But with youth unemployment up beyond 50% in Italy and Spain – not much better anywhere else – and the UK looking into the teeth of a triple dip, you would imagine the tolerance for further austerity is wearing thin.

    • The other thing I forgot to mention in the earlier post is that there is an increasing stink in Europe about the funds which have certainly departed Cyprus in the weeks from mid February onward.

      Too many people obviously knew what was about to unfold (not just Russians).

    • In summarising Cyprus Gunna you have put your finger on the problem. What we are doing is unsustainable however we are not equipped to do anything else.
      How do you get production going in Cyprus at any level when you are dealing with people who are used to an easy life sitting in air-conditioned offices shuffling Russian money?
      This applies across the whole western world.

      • You wont get a disagreement this end flawse

        But as always it is in the timing of how the concept pans out.

        I have had an interesting view put to me in the last half an hour. A mate in London (a Scot) is of the view that if Scotland votes for independence (or even if it appears increasingly likely to) in the referendum they will have, then there is likely to be far more protest in the UK.

        Basically we have a western world used to sitting around in offices shuffling dodgy money from a lot of locations as its most influential economic sector almost everywhere – and Cyprus hasnt been the biggest location for doing this.

        • Gunna (off topis a little) Do you know If Scotland goes independent…who owns what is left of North Sea Oil?

  3. “We all know what to do, we just don’t know how to get re-elected after we’ve done it.”
    ―Jean-Claude Juncker

    I pray that what Juncker said is true, as it indicates some moral concern and has SOME potential for realistic policy. However I fear that few understand the really long-term factors at play

    I wonder how few people see the real problem.
    How many see the mess we have made of our education systems?
    How many still argue for increased consumption as a solution to economic problems?
    How many still argue for lower interest rates or debt jubilees as the easy solutions while not giving a rats about morality?
    How many look at TV advertising and wonder what it has done to our expectations, our type of consumption and societal psyche?
    How many look at the long term particular geo-economic factors that have played out over 50 years to arrive at where we are and where we will be in 10 or 20 years time?

    Do they really know the seriousness of our situation and are just trying to game the system while there is some of it left? Do they just not care?
    Or are they just pig ignorant morons who don’t know and don’t care?

    I dunno!

    • I dunno either Flawse….great comments between you and Gunna.
      I find it so interesting seeing with my own eyes things right in front of me like for example last Easter Monday the wifey and I went for a drive here in Sydney and ended up at Watson’s Bay…heaps of a lucky non pay park spot and ambled down for some refreshment… Fish n chips at Doyles began at $43 each,forget that, went to pub next door and had 2 middies at $14 (we were thirsty)and watched all these people queue up for over 30 mins for overpriced pub grub…Yesterday went to visit my friend in Revesby who’s family owned one of the best tooling workshops in Australia…used to employ over 30 skilled people, now down to 2..and they weren’t there..I said where are they and he said Iv’e got no work for them so I gave them the rest of the week off and I don’t know how I can afford to pay them their entitlements if I got to make them redundant….then I sit down in front of the TV last night and I listen to how Sydney real estate is charging ahead up to 2010 levels again and stocks are around the 5000 mark….as you said Flawse…I Dunno.

      • Its the high AUD destroying one sector of the economy even though the macro numbers are (comparatively speaking against most of the developed world) extraordinarily good.

      • Thanks snail…”who’s family owned one of the best tooling workshops in Australia”
        That’s the bloody tragedy. The very things we will need if we are ever going to rebuild this country are being wantonly destroyed.
        Add another generation to the rebuilding time!

        I wish Glen, Parko, et al would go visit them and explain how wonderfully we are doing….how about it you guys from Treasury and RBA?

        • dumb_non_economist

          Trouble is we have too many finance/bean counter types and not enough engineering types running companies/gov etc.

          About the only companies who have operational people running the show these days seems to be mining/construction companies.

    • We have forgotten that the mechanisation and automation of work was going to endow us all with free time.

      Instead we have isolated most of the free time in one group of people, rather than sharing the work and free time more equally across society.

      That free time used to be held by agricultural workers and hunter gatherers in developing countries except it wasn’t free time to them because they had no mechanisation and needed it all to sustain food production.

      Now globalism and free trade have done the work of socialism by moving lots of jobs from the developed to the previously developing world, moving the free time to the developed nations who have allowed it all to flow to the unemployed.

      We give the older unemployed with families enough to barely sustain themselves with some assistance with charity, while the young unemployed move home to reduce expenses dramatically.

      • Time for Australia to leave the failing Global economy.If we have to make /grow what we need there will be less work for bean counters who then become productive workers.

        Aus has every thing it needs to be self sufficient, indeed 50 years ago it was, & exported only it’s surplus.

    • Frankly there doesn’t seem to be a lot wrong with any of thatexcept for “suspending the right to travel first/business class by state officials,
      senior government officials and employees with the exception of
      transatlantic travel.”
      Screw that! The average bod has to travel economy trans Atlantic or Pacific….why the hell should Public Servants travel in luxury that the poor buggars working to keep them can’t afford?

      However the real problem is Cyprus is totally screwed as above…what the hell can any of them do? What will produce the income?

      • No resources industry at present, no manufacturing to speak of, small land area so no efficient agriculture.

        A good climate and high proportion of coast line.

        The answer is to ensure all coastal property is used for tourism employing people and not allowed to be held empty or in single private families. The Cypriots then live inland and work in the coastal resorts. The rest do their best on the agricultural land.

        The young educated multilingual group leave Cyprus and follow the jobs, some will qualify for family reunion immigration in non-EU countries, others will compete for jobs in other EU countries.

        Heaven help them all!