Weekly Review: Fixing Europe?
For the past two weeks, my weekend summaries have focused on Europe. The reason is simple - events in Europe are and will continue to affect the global business, financial and economic systems.
Econintersect continues to highlight the issues and opinions from a wide range of economists including Dirk Ehnts, Michael Pettis, Elliott Morss, Warren Mosler, John Muellbauer, Keiko Murata, Pippa Malmgren, LEAP/E2020, James Hamilton, Michael Hudson, Menzie Chinn and many others - see first and second items under author's photo.
The situation as I post this according to the BBC:
Last night most of Europe's governments gave up a chunk of their sovereignty. In the future, tax and spending plans will be shown to European officials before national governments.There will be automatic sanctions against those countries that overspend. A monetary union has moved towards being also a fiscal union.As a result of the late-night negotiations, there is now a two-speed Europe. French President Nicolas Sarkozy accepted that. He said it was
The argument now will be if this agreement will be implemented - and if it is, whether it will work. Most economic theory subscribes to the notion that monetary (currency) and fiscal (government) operations must work together - and in Europe, they were operating independently.
Europe is Europe. It is not the USA or Japan or a BRIC. It is a collage of ideologies. Think of a canoe with the rowers each trying to paddle in a different direction. History shows you can make bad solutions work - but the paddlers must be rowing in concert.
The Eurozone is a confederation - individual countries which have agreed to give up a few sovereign rights to benefit from a free trade zone and a common currency. But they still are up to 27 independent countries with 27 different fiscal structures.
Yet, there are signs that the Eurozone was adjusting without Keynesian style intervention using monetary policy. In the old world of backed currencies which had fixed currency exchange rates similar to the Euro, the economic correcting mechanism for countries performing poorly was deflation of goods and services to regain competitiveness.
Conversely, prices of goods and services in countries doing relatively well inflated. According to a Business Insider post quoting SocGen analyst Klass Baader:
In Q2 2011 (latest data) Germany exhibited the fastest hourly wage growth anywhere in the euro area outside of Slovakia, and at 4.8% yoy substantially higher than the euro area average of 3.6%. Austria, too, which experienced very low ULC [unit labor costs] growth in the first ten years of EMU, is showing above average increases (4.0%).
No country yet has shown the way to resolve this global debt crisis which continues to erode the global economy - the USA papered over the problem, Japan continued to ignore it, and Europe scheduled a lot of meetings.
If this agreement holds - Europe has chosen the path of austerity. In some ways this can be viewed as bloodletting to cure illness. But it is a plan, and if all the rowers cooperate - there should be a chance of success.
But this austerity approach requires time to gain traction, and it is not clear whether this agreement has enough weapons to fight the strains of detoxing from Europe's debt.
Economic News this Week:
The Econintersect economic forecast for December (third article under author's photo) predicts weak but improving economic growth.
ECRI has called a recession. Their data looks ahead 6 months and the bottom line for them is that a recession is a certainty. The size and depth is unknown. Although Econintersect's data is not recessionary (one month look-ahead) - we take this recession call seriously. This week the actual level of ECRI's WLI index was "less bad" - but as the graphic shows below, the index has been in a range between -7.4 and -7.8 for the last four weeks. However, this index is still indicating the economy six months from today will be worse.
Initial unemployment claims fell 23,000 (from 404,000 which was revised up from a preliminary 402,000 last week) to 381,000. Looking back, the last time initial unemployment claims were this low was in mid-2008.
Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background here). The real gauge – the 4 week moving average – fell slightly to 400,000. Because of the noise (week-to-week movements from abnormal events), the 4-week average remains the reliable gauge.
Overall the data this week continued to show a weakly improving economy. There were no recessionary flags. The global markets continue to react to developments in Europe.
Bankruptcies this Week: Dynegy Holdings (DH), Privately-held Northampton Generating, Clare Oaks
Click here for interactive version of following table with active hyperlinks.