Austerity claims victory in Europe

Another night of relatively strong data out of Eurozone with services and composite PMIs looking mostly stronger, the UK also screamed ahead.

Eurozone economy stabilises as German recovery accelerates and downturns ease in France, Italy and Spain

  • Final Eurozone Composite Output Index: 50.5 (Flash 50.4, June 48.7)
  • Final Eurozone Services Business Activity Index: 49.8. (Flash 49.6, June 48.3)
  • German recovery gains momentum while downturns in France, Italy and Spain ease further

July marked a tentative return to expansion for the eurozone economy, as manufacturing output posted a solid expansion and the trend in services activity moved close to stabilisation. At 50.5 in July, the final Markit Eurozone PMI® Composite Output Index rose to a near two-year high and posted above the neutral 50.0 mark for the first time since January 2012. The headline index was marginally above its flash reading of 50.4.

Manufacturing production rose at the fastest pace since June 2011, as the sector registered output growth for the first time in 17 months. Meanwhile, the rate of contraction in services business activity was negligible and the weakest during the current one-and-a-half year downturn in the sector.

Among the big-four nations, growth was led by Germany, where rates of increase in manufacturing output and service sector activity hit 17- and five-month highs respectively. France, Italy and Spain meanwhile saw overall rates of contraction ease further.

France and Italy both moved close to stabilisation, Source: Markit, Eurostat. GDP gross domestic product as solid growth at manufacturers largely offset slower declines at service providers. Spain saw output decline in both sectors.


So as we’ve seen over the last month or two the news out of the Eurozone is slowly getting better and it’s definitely great to see that even the Italians have managed to slow the rate of decline, although contraction is still evident, as it is in Spain. It must be noted however, as I spoke about last week, this is all taking place in an environment in which periphery debt to GDP continues to grow. That is, the government sector is still providing an offsetting deficit that allows this private sector adjustment to take place in the absence of large enough external demand. Re-balancing is taking place, but there is still a very long way to go with this adjustment, as can be clearly seen from the rate of unemployment in many of these countries. There is a problem, however, and that is that many of these nations are reaching a point where debt to GDP once again becomes a concern. What is needed, and we are likely to see from in Greece in the near future, is a further write-down of debts before we can truly say there is a sustainable recovery taking place.

That reality, however, hasn’t stopped some “interesting” reporting on the matter:

Can a program of austerity and structural overhauls extricate an economy from a debt crisis? Is it really possible for a country to achieve a so-called internal devaluation—restoring its competitiveness by cutting wages and boosting productivity rather than lowering its external exchange rate? Are European democracies capable of confronting vested interests and coping with the resulting social upheaval?

Until now, the small group of believers—mostly to be found in Berlin—have been widely dismissed as freaks or sadists. The conventional wisdom argued that the only possible escape for countries like Spain was a large-scale mutualization of euro-zone sovereign debt or to quit the single currency.

The government of Mariano Rajoy has, however—through necessity as much as conviction—set out to prove them wrong.

What is certain is that the stakes couldn’t be higher—for Spain and the euro zone: A self-sustaining recovery would remove one of the biggest threats to the survival of the single currency.

No less importantly, it would vindicate Berlin’s approach to handling the crisis and send a powerful message to other governments tempted to look to debt mutualization as an easy alternative to the hard business of reform.

I genuinely hope that isn’t the actual position of the “small group of believers” and this is just journalistic silliness. I mean seriously, you don’t have to look very far to find evidence of the massive destructive social implications these programs had on the future of Spain. A recent story from the BBC for example:

Scientists in Spain claim the long-term future of the country is being sacrificed, because of what they call “short-sighted” austerity measures.

Research and development in Spain has been cut by around 40% in the past five years. The Spanish government says the private sector needs to do more, but many scientists are simply leaving Spain and taking their work abroad.

And it’s not like those supposedly able to claim vindication weren’t complicit in exacerbating these long term issues, in fact they were running domestic programs to exploit these exact problems:

Germany’s International Placement Service (ZAV), which is responsible for recruiting foreign workers to fill the gaps in the country’s job market, is feverishly scouring southern Europe for skilled workers such as engineers and scientists, nurses and care workers.

On top of that there were incentive programs to entice the youth from other nations to come and work in countries that were doing better economically:

Germany has launched a £120 million drive to entice young workers from Britain to come to the country and work as apprentices by offering generous all-expenses-paid schemes.

Obviously there is nothing wrong with these programs in a single-market, and I would hope that one day Spain recovers to a point where it can do some enticing in the other direction. But it is quite incredible that an ideology that has been perpetually wrong for the past 5 years, can sweep all of that under the carpet and claim victory when it can finally find one example that may, possibly, at some time in the future,  vindicate a position.

There is much more to be done in the Eurozone and things are slowly improving, but misreporting history and harking back to old policy failures as if their atrocious outcomes were expected, and now the are some form of success, certainly  isn’t going to help anyone.

Eurozone PMI report below.

EuroZone Composite PMI August 5th 2013

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  1. “you don’t have to look very far to find evidence of the massive destructive social implications these programs had on the future of Spain”

    It’s the debt and distortion built up over three decades that had the massive destructive social implications.
    Blaming it on reform is the part that’s ‘silly’ Suggesting that we can just simply go on increasing debt is ‘silly’.
    Suggesting that you can reform or change anything without dislocation is silly.
    The Financial Times, Ambrose Pritchard, is ‘silly’!

    • +100 flawse.

      What is happening, as long as they continue the process, is educating themselves in the harshest way that Debt has consequences. Excessive Debt has excessively harsh consequences. A lesson Europe has to learn.

      What Spain is pining for are the days of free handouts from Govt so they can continue with a sublime lifestyle. You can only have that if you have a productive economy that can afford it.

      What the empirical evidence is showing is that despite the alarmist claims, fiscal prudence is producing the desired results. This is because the economy is beginning the changes necessary to reduce it’s reliance on Debt and Govt funding to grow. Proof that when Govt gets out of the way, the economy can and will begin to renew by itself in productive ways. No surprises really.

  2. As surprised as I am with myself, I have to agree with Flawse. The painful readjustment in Spain is helping to eliminate the structural and institutional rot, something that would be impossible had they gone “Italian” and devalued. Besides, private debt (the real problem for Spain) is still very high albeit slowly decreasing. As for Germany causing a brain drain, this is at best a fallacy. Spanish universities are known for producing lots of well educated but work-shy graduates. A stint in the North will do them and the country some good.

    • The Eurozone is a very diverse place and each country and region are unique with different cultures. Southern Europe had been a time bomb waiting to happen due to demographics, political culture and like elsewhere, a huge debt binge, with the roots from post WWII generations of central government largesse.

      Interestingly, many southern Europeans do not take advantage of EU mobility e.g. move elsewhere for employment, since many do not have the required skills.

      Too many go through the middle class rites of passage attending university for free, and then potentially looking at a generation of unemployment….

      Germany is a case in point for those governments encouraging untargetted and increased participation in higher education (of course not lobbied for by universities….), increasing proportion of German high school leavers, including those with university offers, are choosing technical training, i.e. leads to employment.

  3. Ronin8317MEMBER

    The biggest disaster for those countries is joining the Euro, and the only solution is to default and exit.
    ‘Going into debt more slowly’ is not economic recovery, and a country that spends over 6% of their GDP on interest payment is doomed to deficits forever.