29/6/20: Eurocoin Growth Indicator June 2020

Using the latest Eurocoin leading growth indicator for the Euro area, we can position the current COVID19 pandemic-related recession in historical context.

Currently, we have two data points to deal with:

1. Q1 2020 GDP change reported by Eurostat (first estimate) came in at -3.6 percent with HICP (12-mo average) declining from 1.2 percent in January-February to 1.1 percent in March.
2. Q2 2020 Eurocoin has fallen from 0.13 in March 2020 to -0.37 in June 2020 and June reading is worse than -0.32 recorded in May. This suggests continued deterioration in GDP growth conditions, with an estimate of -2.1 percent decline in GDP over 2Q 2020. HICP confirms these: HiCP dropped from 1.1 percent in March 2020 to 0.9 percent in May. 

Here are the charts:

We are far, far away from the growth-inflation 'sweet spot':

6/5/20: Eurozone Composite PMI: Covid Horror Show

Final Eurozone Composite Output Index came in at 13.6 (Flash: 13.5, against March Final: 29.7). March was bad. April is worse. Final Eurozone Services Business Activity Index was at 12.0 (Flash: 11.7, March Final: 26.4), final Manufacturing PMI covered here: https://trueeconomics.blogspot.com/2020/05/4520-eurozone-manufacturing-pmis-crater.html.

1Q 2020 implied decline in Euro area GDP is at around 3.5%. 2Q 2020 start is now worse than 1Q 2020.

10/1/20: U.S. Tariffs on European Wines: Inflicting Self-Harm

Next week, the  Office of the US Trade Representative is expected to make a determination on the potential imposition of an up to 100% tariff on imports of wine from Europe. Which is a bad thing for the overall state of the global trade, bad news for the European producers of wine, bad news for the American consumers and their European counterparts, and bad news for the U.S. wine industry. But 'bad things' do not stop there. There will be costs imposed on restaurants and bars. There will be negative spillover effects - in the long run - to the competitiveness of the U.S. wine making industry competitiveness. In other words, the new tariffs are a perfect exemplification of how poor policies in one sector can hammer the entire complex chain of value added across a much broader economy, both in the long run and the short run.

Let's start from the top.

Causes

The reason for the introduction of the tariffs on wines made in Europe - the first wave of which came in in October - has absolutely nothing to do with the wine makers or wine importers or wine consumers. Back in September this year, the WTO Arbitration Panel has ruled that Boeing (the U.S. civilian aircraft manufacturer - in addition to being also a major military-industrial complex player) and Airbus (Boeing's European counterpart) received tens of billions in illegal state supports and subsidies over the period of 15 years. These supports included tax subsidies and credits and subsidised loans. All of which was well known to anyone even remotely familiar with economics of both the EU and the U.S. well before the WTO rulings.

Given the state of the U.S. trade policy (War First, Trade Later) and the fact that Boeing is in a pile of financial problems stemming from its disgraceful handling of the 737 Max scandal, the U.S. rushed out of the stables to mount its trade offensive against the EU. imposing 25% tariff levy against European wine producers. The measure, of course, was 'designed' (if one call it thus) to hurt European economies. Wine industry is iconic for countries like France (Airbus major domicile), Italy (which hasn't much to do with Airbus and was partially spared from the hit) and Spain (another Airbus HQ domicile). Germany also got hit, especially given its well known white wine production. Now, Airbus has also major presence in Mobile, Alabama, USA (where is works on A319, A320 and A321 models) and Mirabel, Canada (A220 model), although Chateau Mobile and the fabled reds of Mirabel were spared by the U.S. trade authorities.

The new round of tariffs - the 100% ones being currently considered - also come on foot of the finding that France’s new digital services tax discriminates against US tech companies, according to USTR, even though the French tax is a de facto precursor to the OECD's Digital Services Tax initiative (covered here: https://trueeconomics.blogspot.com/2019/08/12819-oecd-tax-plans-some-bad-news.html and, in more detail, here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3406260).

European response to the same triggers was to call for a negotiated resolution of the disputes over Boeing and Airbus. Which, of course, is not how the U.S. does business these days.

First round impact

The first round of sanctions had little impact on the wine makers, hammering instead U.S. supply chain - distributors, warehousing, wholesalers and retail - and U.S. consumers (just in time for the Holidays season). The reason for this is that European producers have a massive latent excess demand for their wines in Asia-Pacific and Eastern and Central Europe, where consumers prefer European wines - by taste, brands and cost points - to the U.S. wines. U.S. distributors and wholesalers took a direct hit: most of the 25% tariff has been absorbed into lower profit margins by the importers.

One of the reasons this worked is that the U.S. demand for wine is growing, which means that for relatively benign tax hikes, suppliers can lower unit margins in hope of compensating with continued growth in demand.

Demand has grown from the recent plateau of 2 gallons pa per person in 1999-2002, to just under 3 gallons in 2018. This margins logic breaks down when tariffs rise above 35-40% mark, making cost pass-through to the consumers virtually unavoidable.

A message from the small wine importing firm, specialising on ESG impact-driven natural wines, makes another case: http://www.jennyandfrancois.com/2019/12/17/wine-tariffs-threaten-our-very-existence/. "These [proposed 100%] tariffs are really without precedent, but to glimpse a window on the possible disastrous consequences, we could examine the 1930 Smoot Hawley Act. History teaches us that this act hastened the arrival of the Great Depression, extended its length, led to a 65% downturn in global trade, and made imported goods a luxury item only affordable to the top 1% of the American population. What’s more, those tariffs were only between 40-48%, not the 100% tariffs currently in discussion. Smoot Hawley is the reason most of the world’s leaders today favor unregulated free trade." And "I spent 20 years of my life building a successful business, and in one signature the Trump administration could make it all crumble."

Killing wine wasn't a great policy back in the 1930s. For everyone involved. Hammering European wine today won't be either.

A wider impact can be seen in the restaurant and catering sector. Here is how disastrous tariffs on wine can be for restaurants business: https://www.postandcourier.com/blog/raskin_around/proposed-wine-tariffs-could-spur-widespread-charleston-restaurant-closures-opponents/article_3a07ee26-2e44-11ea-a9e1-b3eafe8429c4.html. "One downtown Charleston restaurant owner estimates the loss of Prosecco alone would amount to a $57,167 annual revenue loss... Just those drinks hypothetically work out to more than $1,000 a month in server tips, on average. Assuming that loss is equally shared by a 12-person front-of-house crew, each employee would be out approximately $94, or about two-thirds of the average monthly household utility bill in Charleston."

The impact is not lagged: "when the 25 percent tariff was implemented, Root says, “it became part of our working capital immediately. We had to come up with $40,000 unexpectedly” in order to free up wine which had already shipped. But he characterizes a 100 percent tariff as “impossible.”"

Even in the time-sensitive, so less tariff-elastic cases, it is the U.S. businesses that have been absorbing the lion's share of the cost increases, as illustrated by the 2019 vintage of Beaujolais Nouveau release last year that came after the 25% tariff hike of October 2. This is covered well here: https://www.winemag.com/2019/10/29/tariffs-on-european-union-goods-impact-u-s-wine-industry/. In theory, producers should be absorbing more of the tax increase cost in lower elasticity supply cases. But due to supply chain complexity and the fact that producers face global demand, with lots of substitution options, while the U.S. wholesalers, retailer and consumers have inelastic demand (due to timing-sensitive nature of the market for Nouveau releases) this is not the case.

Bad news for the U.S. producers

So higher tariffs on European wines should be a good thing to the American producers of wine, right? After all, as prices of their competitors rise, their products should experience increased demand due to consumer substitution in favor of cheaper alternatives.

This is a fallacious argument, given complexity of the wine business.

Firstly, price-sensitive consumers who have a greater incentive to switch away from European wines toward other alternatives are likely to go for cheaper Chilean and Australian wines instead of the already higher-priced Californian, Oregonian and other U.S. offerings.

Secondly, demand for all wine is likely to decline due to higher prices, but also due to the reduced range of wines that consumers might consider affordable to them. Consumers do not simply buy the wine by the price. Instead, consumers buy, say, California wine because they want something different from the Italian wine, and they buy Italian wine to diversify their consumption (broaden the range of taste options) from French offerings, and they buy French offerings because they have been consuming Spanish ones, and so on, until they reach back to California wines. It is exactly the same with food: making Thai cuisine more expensive does not necessarily mean Italian restaurants will gain more customers. Instead, it might mean that consumers will reduce demand for eating out in all restaurants and switch to fast food instead.

Thirdly, wine business is also complex. U.S. producers innovate and collaborate with European producers. Adversarial trade is not good for technology and intellectual property transfers between them. And U.S. producers are also worried about inevitable EU counter-measures. Worse, if tariffs were to trigger significant drop off in the number of wholesale, retail and restaurant businesses and trading volumes, smaller U.S. producers (who tend to be more innovative and have greater intellectual property investments in the industry) will have fewer channels to sell and market their own offerings. Here is one California wine producer views on the effect of potential decrease in the number of wholesale / distribution partners under the 100% tariffs proposal: https://tablascreek.typepad.com/tablas/2019/12/no-100-tariffs-on-european-wines-wont-be-good-for-california-wineries.html. To quote them on restaurants part of the chain impact alone: "Restaurants are famously low-margin businesses anyway. Increasing the costs of their wine programs will push some out of business, further reducing outlets for our wines."

Lastly, no U.S. producer of wine would want to face a prospect of their brand capital worldwide being associated with state-imposed tariff 'protection'. Majority of the American winemakers compete on their own creativity, experience, and marketing. In a highly product-differentiated world, hammer-all tax measures do little to help indigenous producers to succeed. They dilute quality of signalling that successful brands develop with their sweat and capital.

To quote, again, the excellent Tablas Creek folks (link above): "Why wouldn’t the wine community just switch its sources to other, non-tariff countries? Wine is not a commodity, where a customer can simply swap in a wine, even one made from the same grape, from one part of the world for another and expect them to be comparable. Wines are products inextricably tied to the place in which they are produced. And the disruption of 100% tariffs on wines from the world’s oldest wine regions would have cascading impacts that would reach deep into a whole network of American businesses, investors, and consumers."

10/1/17: Losing Trust and Social Capital: U.S. and Europe

The U.S. National Intelligence Council January 9, 2017 report on future global trends titled “Paradox of Progress” cites income inequality as one of the reasons for emergence of anti-free-trade sentiments in the West (see page 12 here: https://www.dni.gov/files/images/globalTrends/documents/GT-Full-Report.pdf) and links income inequality to declining public trust in U.S. institutions (page 32, above).

These risk assessments are supported by recent research from the IMF.

A recent IMF research paper by Gould, Eric D. and Hijzen, Alexander, titled “Growing Apart, Losing Trust? The Impact of Inequality on Social Capital” (from August 2016, IMF Working Paper No. 16/176: https://ssrn.com/abstract=2882614) observes that “There has been a sharp decline in the extent to which individuals trust one another, and other social capital indicators, over the past forty years in the United States”

So, observe the first fact: trust and social capital have declined in the U.S. over time.

Next, the IMF paper notes that “income inequality has tended to increase” in the U.S. over the same period of time. The paper then goes on to examine “whether the downward trend in social capital is responding to the increasing gaps in income.” The authors use U.S. data to test this possible relationship and contrasts the dynamics against the data from the EU. Beyond this, the analysis also “exploits variation across [U.S.] states and over time (1980-2010), while our analysis of the [european data] utilizes variation across European countries and over time (2002-2012).”

Per authors, “The results provide robust evidence that overall inequality lowers an individual's sense of trust in others in the United States as well as in other advanced economies. These effects mainly stem from residual inequality, which may be more closely associated with the notion of fairness, as well as inequality in the bottom of the [income] distribution.”

Some more on the findings:

1. “The results suggest that inequality at the bottom of the distribution lowers an individual’s sense of trust in others – in the United States and in Europe,” and per IMF, the relationship is causal: greater inequality at the bottom of income distribution causes loss of trust.
2. “For the United States, it appears that inequality at the bottom of the distribution is the main component of inequality that reduces trust, and this phenomenon is mainly confined to those that are negatively impacted by that component of inequality – individuals who are less educated and those at the lower third of the income distribution.” Were these ‘negatively impacted’ not at least a subset of the voters that Hillary Clinton described as ‘deplorables’?
3. “The trust levels of Europeans are also negatively affected by increasing inequality levels. However, in contrast to the United States, the impact of inequality on trust in Europe is more general. Inequality at the top and bottom of the distribution seem to have a negative impact, and the negative effect is shared across education groups.” Again, any wonder that Europe nowadays has emerging Left and Right wing populist political movements, that are more sustained over time than either Bernie Sanders’ and Donald Trump’s campaigns in the U.S.?
4. 4) Interestingly, in the context of ‘1%-er’ arguments: “For both the United States and Europe, the results do not provide any support for the idea that increases in inequality at the very top of the distribution, such as the top 1 percent or top 5 percent shares, have led to a decline in overall trust levels. The significant negative effect of inequality on trust is apparently not driven by inequalities at these extreme ends of the distribution.”

So, perhaps it is the structure of the U.S. and European institutions and the ways in which these institutions function on the ground that are causing the deterioration of trust and social capital? And, perhaps, looking at broader income and jobs outcomes, rather than focusing on '1%' arguments, can be a more productive approach to starting reshaping U.S. and European systems to address the ongoing loss of public trust and social capital?

11/11/2016: Europe's 'Convincing' Recovery

Europe's strong, convincing, systemic recovery ... the meme of the European leaders from Ireland all the way across to the Baltics, and save for Greece, from the Mediterranean to Arctic Ocean comes to test with reality in the latest Pictet Quarterly and if the only chart were all you needed to see why the Continent is drowning in populist politics, here it is:

As Christophe Donay and Frederik Ducrozet explain (emphasis is mine):

"Since 2008, the world’s main central banks have used a vast array of transmission channels: currency weakening to reboot exports; reflation of asset prices to boost confidence; a clean-up of banks’ balance sheets to boost the credit cycle. But, ultimately, all these measures have failed as economic growth remains subdued. Indeed, the belief that countries have become trapped in suboptimal growth and that developed economies, especially in Europe, look set to complete a
‘lost decade’ of subpar growth (see graph) since the financial crisis forms the third strand of criticism of monetary policy."

Whatever one can say about the monetary policy, one thing is patently obvious: since the introduction of the Euro, the disaster that is European economy became ever more disastrous.

Enter Trumpist successors to characterless corporatist technocrats... probably, first for worse, and hopefully later, at least, for better...

4/9/16: Earnings per Share

You know the meme: corporate sector is healthy world over and the only reason there is no investment anywhere in sight on foot of the wonderfully robust earnings is that… err… political uncertainty around the U.S. elections. Because, of course, political uncertainty is everything…

Except when you look at EPS

H/T @zerohedge 

Now, what the above is showing?

1) EPS is down in the politically ‘uncertain’ U.S.

2) EPS is even more down in the politically less ‘uncertain’ Europe (though you can read on that subject here: http://trueeconomics.blogspot.com/2016/09/4916-some-points-on-russian-european.html

3) EPS has been falling off the cliff since the ‘political uncertainty’ (apparently) set in 4Q 2012 in the U.S. One guess is the markets expected, correctly, the epic battle between The Joker and the Corporate Godzilla back then. And in Europe, since mid 2013, apparently, markets had foresight of who knows what back then.

But never mind, there is no secular stagnation anywhere, because earnings are, apparently very very healthy… very robust… very encouraging… All of which means just one thing: the markets are not overpriced or overbought. Pass de Kool-Aid, lads!

11/12/2014: TLTRO2: Misfiring that Bazooka... Again

Second round of TLTROs take up at EUR129.84bn. Prior market consensus expectation was for EUR130bn, with range of EUR 200 billion 'bulls' expectation and EUR 100 billion 'bears':

- Morgan Stanley at EUR120-170 billion, 

- Deutsche at EUR170 billion

- Citi at EUR165 billion

- BNP at EUR140-180 billion

- JPM at EUR190 billion

- BAML at EUR130 billion

So 'bears' have it. New tranche of TLTROs as expected better than the 1st tranche (http://trueeconomics.blogspot.ie/2014/09/1892014-quite-disappointing-tltro-round.html) but still disappointing. Back in September, I expected two tranches to amount to close to EUR300 billion. We now have less than EUR213 billion. This is a massive undershooting on expectations for majority of markets analysts. One of Draghi's 'big bazookas' is currently misfiring charcoal instead of bullets, placing more pressure on the ECB to get into QE-like actions in January.

28/10/2014: Page 75... ECB Washes Out Its Big Bazooka QE with New NPLs...

In the previous (lengthy) post I covered my view of the ECB stress tests results. But, per chance, you have missed two core points on these, here they are, in a neater summary:

Point 1: Stress tests are weak compared to expectations and independent analysts' estimates of capital shortfall (by a factor of up to or in excess of10:1).

Point 2: Stress tests have raised non-performing loans levels in the euro area banking system by EUR136 billion to EUR879.1 billion or close to 9% of the euro area GDP. The increases were recorded in all categories of loans, which in simple terms means the banks have been under-providing for loans losses across all categories of their core assets.

Now, that puts into perspective the ECB's 'big game all-in' shot for TLTROs and ABS purchases targeting to raise ECB balancesheet exposures by... you've guessed it... EUR1 trillion.

Why, despite improving asset markets, stoic rhetoric of deleveraging and historically low cost of central banks' funds, the NPLs are climbing... and by the end of the ECB's big bazooka firing, that EUR1 trillion is probably will be just about enough to cover the outstanding NPLs. Assuming economy does not tank any more, in which case, it might fall short.


Update: Here's WSJ Blogs analysis of the effects application of the tougher quality tests for Core Tier 1 capital would have had on ECB stress test results: http://blogs.wsj.com/moneybeat/2014/10/27/tough-new-rules-would-have-caused-ten-more-stress-test-fails/

26/10/2014: Mind the ECB 'Stress Tests' Gap

The pain of European economy's Japanification is going to be proportionate to the cheering of the ECB 'stress tests' results.

The real problem faced by European economy is that of the depressed domestic demand (investment and consumption). This problem is fuelled by:
1) declining real incomes of those working,
2) continued sky-high numbers of those who are not working (unemployed, discouraged and never-once-employed workers left out in the cold),
3) growing unease amongst older workers about the state of their pensions,
4) rising burden of the state (including state debts),
5) growing pressure of redistribution of income from households and SMEs to politically favoured white elephant projects (e.g. renewables subsidies, large infrastructure spending, farm supports, regional integration etc),
6) un-abating waste at the EU and national levels anchored to corporatist politics selectively rewarding specific interest groups interests at the expense of entrepreneurs, younger workers, ordinary households and domestic firms, and
7) demographic collapse spreading across the continent as populations age and children remain dependent on ever older parents to support their education and transitioning into joblessness.

This real problem is driving down domestic demand, and with it depressing economy, but also spreading rot across the banks balance sheets.

And yet, despite the obvious and ever-deepening macroeconomic crisis of depressed demand, the ECB stress tests released today provide no insight into what can happen to the banks balance sheets should Japanification set in. Worse, the entire exercise of 'stress tests' is once again not much more than a PR stunt dreamed up by the folks who are 'would be' chief economists for the sell-side equity research.


Here's why.

Back in January 2014, two academics published a preliminary assessment of the Euro area banking union capital shortfalls: http://www.voxeu.org/article/what-asset-quality-review-likely-find-independent-evidence.

This identified stressed shortfalls estimated at between €82 billion and €176 billion (4% benchmark capital ratio) and €509 billion to €767 billion (7% capital ratio) based on book capital.  Take the average to compare to ECB results: ca EUR295-470 billion. "The market capital shortfall estimates indicate a capital shortfall of €230 billion (4% benchmark capital ratio) or €620 billion (7% capital ratio) for the 41 publicly listed banks". Take the average to compare to ECB results: EUR425 billion.

Worse, "estimates of SRISK or the capital shortfall in a systemic financial crisis (40% market decline over a six-month period) is €579 billion; 41% is due to downside correlation with the market, while 59% is due to the leverage of these institutions." So compare to 20% decline under ECB tests (across property assets, 30% decline) and get roughly half of the above figure at EUR290 billion.

Ugly? Try next: "Capital shortfall estimates when writing down their net non-performing loan portfolios range from €232 billion (using the C Tier 1 ratio and an 8% threshold as in the AQR) and €435 billion (using the tangible equity/tangible assets ratio and a 4% threshold)." Again, average these out at EUR330 billion or so.

And get this: "There is a high rank correlation between the shortfalls based on book and market capital ratio measures [but] no significant correlation between shortfalls calculated using regulatory (i.e. risk-weighted asset-based) capital ratios and shortfalls calculated under market or book capital ratios… this highlights how flawed risk-weighted asset-based measures can be."

Take the conclusion in with a deep breath: "Cross-country variation in our capital shortfall estimates indicate that:

• French banks are leading each book and market capital shortfall measure, both in absolute euro amounts and relative to national GDP. The capital shortfall ranges from €31 billion (using the equity/asset ratio and a 4% threshold) to €285 billion (using the tangible equity/tangible asset ratio and a 7% threshold). The SRISK stress scenario suggests a shortfall of €222 billion, which corresponds to almost 13% of the country’s GDP.
• German banks are close seconds, although they benefit from a stronger domestic economy with a higher GDP and a greater capacity for public backstops.
• Spanish and Italian banks appear to have large capital shortfalls when non-performing assets are fully written down. Both countries account for about a third of the total shortfall after write-downs. Market-based measures such as SRISK amount to about 6.5%–7.6% of the GDP of both countries."

So a close common value for estimated shortfalls, comparable to the ECB tests is around EUR290 billion for 41 listed banks (not 150 tested by EBA/ECB).

Oh dear, now think ECB stress tests: The ECB stress tests found virtually none of the above problems to be present or pressing (see full release here: http://www.ecb.europa.eu/pub/pdf/other/aggregatereportonthecomprehensiveassessment201410.en.pdf?d2f05d43d177c25c57e065ebdbf80fe7). Instead, the ECB tests estimated shortfall in the banks to be EUR24.6 billion as of December 2013 and that all but EUR9.5 billion of this has been already rectified by the banks.

This is plain mad not only because it is more than 10 times the number averaged out above, but also because the same ECB review found that some EUR136 billion of loans held by the banks as assets should be classed as non-performing. That is an 18 percent hike in one sweeping year. 85% of banks tested had to revise up their bad loans exposures. And this implies that EUR47.5 billion worth of losses is required to bring these 'assets' in line with their true values.

These losses will have to be covered from either more tightening of existent loans costs or via capital raising or by shrinking returns on equity or all of the above. And these losses are at the lower (as noted by independent analysts) end of the range. And these losses are going to impact future capital access by the banks too, as who on earth would want to stake a house on investing in sick banks hiding the true extent of their losses to the tune of 18 percent?!

All in, Euro area banks now have a hole of EUR879 billion in non-performing loans, facing losses of some EUR300 billion, plus. Based on already stretched (by extend-and-pretend measures adopted to-date) loss rate on non-performing assets. Oh, dear…

Table below summarises sources of NPL increases by category of assets:

As of the end of 2013, per ECB own assessment, some 1/5 of all major banks were in the position of facing high risk of going bust. Forward nine months into this year - what has changed? Nothing, save for the following factors:

1. ECB funding became temporarily cheaper (rates down), but LTROs are being replace by higher priced TLTROs and this means cost of funding going slightly up;
2. Assets valuations have improved on massive monetary stimuli. These being gradually reduced (outside the euro area) is going to depress carry trades that have been helping asset prices boom. Asset values might not fall, but realising these values in the markets forward and counting on their further significant appreciation would be equivalent to taking serious risks.
3. Real economic conditions have deteriorated. Which is far from being trivial, as in the long run, asset values and availability and cost of funding should start reflecting this reality. Once they start, there'll be pain on balance sheets. 

What are the safety cushions post-ECB tests? Ugh, rather thin. Of 130 banks tested by the ECB, 25 failed, 31 had core capital ratio below 10% - the safety threshold accepted in the markets. 28 more banks were within a 10-11 percent range. Thus, 84 out of 130 banks tested were either in an ICU or on ventilators.

Looking back at the main findings from January 2014 paper by Viral Acharya and Sascha Steffen, what is striking is the position of the German and French banks. ECB found virtually no problems in both countries banking systems (see Table below):

Table: Banks that failed ECB tests

Look at geographic distribution of losses under stressed scenario:

Setting aside the proverbial 'periphery' (and Slovenia) there are virtually no problems in the stress case across the national banking system anywhere, save for Belgium, the Netherlands, and Luxembourg. Even Italian system is within 1 percentage point of the median losses. You have to be laughing, right?

And the above only holds for 57% of all assets of the tested banks. That's right, the AQR exercise did not cover all assets held by the 130 banks tested.

Meanwhile, macroeconomic risks factored in are rapidly becoming not stringent enough. The ECB tests were based on EU Commission forecasts from Q1 2014. Since then, the forecasts have seen consistent downward revisions. Instead of focusing on the risk of deflationary recession and stagnation (Japanification), the risks tested were based on bond markets stress, plus recession.

There is virtually no material deterioration in ECB assessment results for German banks compared to previous tests. How? We can only scratch our heads. In the last 2 years, German economy has gone from moderate growth to slow growth and is heading into stagnant growth.

Emerging markets risks exposures were non-existent in the view of the ECB tests, except via higher interest rates impact spillover from the US (assumed by the ECB). Neither were the risks arising from the global slowdown in trade flows. So here's a kicker, if rates are higher and there is a global slowdown, impact on banks balance sheets will be most likely lower than if rates are low (and with them lending margins), but there is a secular long term growth crisis in the euro area itself. Second order effects will be smaller than first order effects.

All in, the 'stringent' tests carried by EBA and ECB took 150 banks and banks subsidiaries and found that 25 of these were short of EUR24.6 billion in capital: 16.7% of banks failed, average capital requirement per failed bank EUR984 million, average capital required per all banks tested: EUR164 million. Contrast this with 2011 when EBA tested 90 banks, failed 20 of these (failure rate of 22.2% much higher than 16.7% in this round of tests), requiring them to raise EUR26.8 billion in capital which amounts to EUR1.34 billion per failed bank (much higher than ECB stress tests this time around) and EUR298 million per bank tested (much higher than ECB tests). Yet, 2011 tests were labeled a farce by the markets.

Today's tests are no better. If not worse.

Worse because they fail to account for the real risks arising in the Euro area today and worse because they create a false sense of security within the system. Or maybe they do not. In which case the entire exercise is a PR stunt, with ECB having a different and more descriptive picture of what is really happening in the banking sector. Maybe so… in which case, does the whole charade qualify as market manipulation by the soon-to-be super regulators? Take your pick, either the regulators-to-be are wearing rose-tinted glasses, or they are fixing the market. Neither is a pretty option...

16/9/2013: Call me, once granny kicks the proverbial...

Structural slowdown? What structural slowdown... not in France and in particular not in the French traditional way of making the living... by inheriting it...

The chart above comes from one of the leading researchers on income and wealth distributions, Thomas Piketty. The key to reading this chart is that as a fraction of total disposable income, inheritance flows are now back at the levels last seen in and around WW1 period. The good old days of the 19th century when landed gentry and hereditary wealth class were all the rage is back in the Liberte, Egalite, Fraternite dreamland of France. Or put in more brutish, American terms - work? why bother, when inheriting things is so much more fun than earning them by merit.

9/9/2013: E. European economies assessment by EU Commission

New paper on Eastern European economies from the EU Commission, titled "The EU’s neighbouring economies: managing policies in a challenging global environment" (Occasional Papers 160 | August 2013 : http://ec.europa.eu/economy_finance/publications/occasional_paper/2013/pdf/ocp160_en.pdf) provides some in-depth stats and analysis of 16 core neighbouring economies, including in the context of the Arab Spring and Russia partnerships.

Here are some interesting stats relating to Russia.

An interesting perspective on the overall Eastern European and CIS economic realm from the point of view of Russia-EU links: "High dependence on both the EU and Russia, along with still weak institutions, is a major drawback for the Eastern neighbours, particularly since the Russian economy shows a relatively high correlation with the EU economy." This suggests that Eastern 'neighbourhood' is not offering a good hedging potential for real economic activities and financial markets - both propositions that are yet to be formally tested, as far as I am aware.

The main pathways for risk transmission between Russia and EU are: financial markets and real trade.

Two tables to highlight risk transmission pathways between EU and Eastern neighbourhood and Russia in terms of trade and tourism :

Forward conclusion: "The Eastern neighbours as a whole, but also the Maghreb
countries (which also benefit less from the buffering role of the GCC countries) seem more exposed to a prolongation or intensification of the euro area crisis, especially since under such scenario the Russian economy is likely to increase its co-movement with the EU cycle."

Another pathway for risk transmission is remittances flows. Chart below illustrates:

However, in recent years, remittances out of Russia have been performing well:

FDI inflows side: "The exposure of the Eastern neighbours to EU FDI also varies significantly across countries. In the region, Ukraine is clearly the country most exposed to changes in EU FDI. In fact, the largest FDI inflows in Ukraine in 2010 (in terms of equity capital invested, i.e. excluding reinvested earnings and intra-company loans) came from the EU (54%) and from Russia (16%). Exposure of other neighbours (e.g. Belarus) to EU FDI is more limited, notably because of the importance of other regional investors, including Russia."

Extent of output links up between Eastern neighbours and Russia is pretty severe for a number of countries:

"The fact that Russia’s growth is also strongly correlated with that of the EU (the coefficient is 0.9 for the period 2000-13" compounds the problem of risks transmission.

More recent data confirms the same:

Quite an interesting set of pathways when it comes to intra-EM risks transfers.

10/7/2013: Four charts that scream 'Wake Me Up, Scotty!'

A look into the future in four charts:

The charts above show the demographic divergence between the US, and other core G7 economies, as well as the differential in trend for France and the UK from Japan and Germany. 

Of course, labour mobility is much more open today than in the 1950s-1990s, but given that back in those days Europe usually sent its brightest to North America (more recently also to Australia and in the near future to the rest of the world, if we keep going at current rates of youth unemployment), and that with the above charts this is not likely to change. If anything, given the rends above, why would anyone young stay in declining Europe? To mind the decaying family estates and pay for the growing demand for geriatric supplies and services? So one has to wonder: is the Old World really going to have any growth?.. Of course, it might be the case that by, say 2050, Europe will harmonize and consolidate and coordinate and centralize and stabilise and OMT itself to such an extent that no one will have to work at all in the paradise fully funded by an unlimited ESM. 

Who knows... but for now, you can play with the UN Population data through 2100 here: http://esa.un.org/unpd/wpp/unpp/panel_population.htm

Updated: an interesting article on the crisis effects on European birth rates: http://hromedia.com/2013/07/10/eurozone-economic-crisis-hit-birth-rates/

13/2/2013: CESIfo Index shows improvements in Global Economy

CESIfo institute has issued its analysis of the global economy and... some good news: per CESIfo index tracking global growth, world economic climate indicator finally is up after two consecutive declines.


The increase in the index "was mainly driven by significantly more positive assessments of the 6-month [forward] economic outlook." At the same time, "assessments of the current economic situation improved only slightly. After 6 months of stagnation, the prospects for the world economy seem to be brightening."

• Asia led the global index rise, with region index "now higher than its long-term average once again. Both assessments of the current economic situation, and especially expectations, have brightened considerably." 
• In the case of North America "the rise in the economic climate indicator was mainly due to improved assessments of the current economic situation. Despite the improvement, the current economic situation is not completely satisfactory in this region." 
• Per CESIfo release: "The current economic situation is also unfavourable in Western Europe. Assessments of the 6-month [forward] economic outlook, on the other hand, were significantly more positive, which led to a moderate overall improvement in the economic climate." 

CESIfo Index panel "on average expect short-term interest rates to remain largely unchanged over the next six months. However, they believe that long-term interest rates are set to increase slightly. On worldwide average, economic experts expect moderate growth in the value of the US dollar over the next six months."

1/8/2012: Global Manufacturing PMIs for July

The summary of July 2012 Manufacturing PMI readings to-date:

Two things worth highlighting:

• Overall the readings are exceptionally poor across the board.
• Of all advanced economies so far reporting, Ireland shows by far the most positive indicator reading at 53.9. This is some huge achievement and the credit here goes primarily to the MNCs trading out of Ireland.

More detailed analysis of Irish PMI is to follow, so stay tuned.

1/6/2012: PMIs May[hem] 2012

As of 11:00 GMT - here's where Europe's heading:

Via BusinessInsider: http://www.businessinsider.com/may-global-pmi-2012-5

11/10/2011: Central Europe: a Catalyst for empowering the EU

On September 9th, GE and Malopolska Regional Development Authority sponsored on of the three plenary sessions at the Krynica Economic Forum 2011, that I chaired, on the future development of the CEE region: "EU 2020 for CEE: a Catalyst to empower the CEE Region?"

This is the edited transcript of the session proceedings.

The objective of the session was to continue building on previous Economic Fora dialogues concerning the long-term development agenda for the CEE region, and how it fits into the EU frameworks and the EU perspective in terms of development and investment, structural funds, and core policy platforms.

The plenary session, chaired by Dr. Constantin Gurdgiev (Head of Research with St Columbanus AG and Adjunct Lecturer in Finance, Trinity College, Dublin), consisted of:
Mr. Ivan Miklos, deputy PM and the Minister for Finance in Slovakia
Mr. Zoltan Csafalvay, the Minister of State for National Economy of Hungary
Mr. Johannes Hahn, the EU Commissioner for Regional Policy
Mr. Ferdinando Beccalli-Falco, the President and CEO of GE Europe and North Asia
Mr. Stephen Gomersall, the Chairman of Hitachi Europe and
Mr. Pedro Pereira da Silva, CEO of the Jeronimo Martins Group.

Economic development, competitiveness and regional experience

Minister of State for National Economy of Hungary, Mr. Zoltan Csafalvay opened the discussion about the CEE regional development in the context of broader EU economic and social development. Minister Csafalvay stressed that although we perceive the traditional divide across Europe to be along the East-West axis, the current crisis shows that this divide is superficial. Instead, "...if we look at the competitiveness gap between Northern and Southern part of Europe, you can see this in productivity, level of flexibility, innovation, and even in economic freedom there is a gap between Northern and Southern part of Europe."

CEE countries are also performing very well during this crisis. For example, the ongoing fiscal consolidation in Hungary in 2011 also coincides with "a very strong pro-business agenda, including cutting taxes, introducing flat tax, reducing red tape, increasing the flexibility of the labour market and reforming the public sector."

Deputy Prime Minister of Slovakia, Mr Ivan Miklos further developed the theme that the lesson from the CEE region past experiences is that coming out of the current crises, "the EU states need to provide fiscal consolidation... [and] deep structural reforms. These are the main pre-conditions for increasing competitiveness." There are two approaches for dealing with the crises currently on the table. The first one is via a political and fiscal union with euro bonds, "which mean to have stronger and stronger coordination and centralization. The other approach is to have more strict and enforced rules, based on competition. I'm strongly convinced that the second approach is a much better approach, because ...in current conditions, a political union will, in my opinion, be politically unsustainable. Economically this kind of policy is not creating a good environment for necessary fiscal consolidation and structural reforms. ...I'm convinced, and the story of the reforms in CEE countries is a strong evidence, that what we need in Europe, is more competition, because we need deeper and more comprehensive structural reforms."

These points were echoed by Minister Csefalvay who stressed the need to increase competitiveness of Europe as a whole, while retaining competition between countries and regions within Europe. The main challenge is "to find a point where we can increase the competitiveness of Europe's single market is certainly a core point, and energy, transport and R&D focus are important. But, if we want Europe to be competitive on the global stage, we should maintain tax competition between member states, competition between different social and economic models, between what different business environments can offer."

EU Commissioner for Regional Policy, Mr Hahn touched upon the issue of policy cohesion and the regional leadership within the context of the need for accelerating economic recovery. "The question we are asking ourselves today is how we should use this investment to transform Europe's economy, so we can recover from the crisis... The answer to that lies in the Europe 2020 strategic framework. There is a need to continue working on removing the obstacles to a competitive economy and this means investing in better transport, energy, water, wastewater treatment, etc." In addition, Europe's success will depend on the capacity to invest in education, research and development, fostering innovation, supporting clusters and information technology developments. "Europe needs to identify paths of smart specialization. Countries of the CEE region have to see that investing in people and in better products and technology is not a luxury..."

Technological innovation is the driving force for the future of CEE economies and for Europe at large and EU regional and cohesion policies are here to help. "For instance for 2007-2013 cohesion policy will spend more than 86 billion euro on R&D and innovation, in particular for small and medium size enterprises. There are significant differences across the regions. Germany for instance invest 28% of it's total cohesion policy allocations in R&D, Poland and Hungary invest 15% and Slovakia only 10%. This is something we have to change... Don't forget that Europe has a negative technological trade balance of  38%. So we import more patents from outside Europe than we export ...[because] we are yet to bridge the gap between basic research" and business innovation. This is where the regional cohesion policy will move in the next years.

 From R&D focus to innovation-supporting services and technologies

There is significant role to be played by the core infrastructure systems development in facilitating human capital-intensive innovation-based economy that the policy frameworks like Europe 2020 envision. This infrastructure - bridging existent gaps in energy, water, wastewater, transport, education and healthcare - can serve as both the source of competitive advantage and the originator of innovation.
To deliver such supports, the economies of scale from regional cohesion and integration in infrastructure development and investment should be used as a significant point of strength, as stressed by Mr. Ferdinando Beccalli-Falco, the President and CEO of GE Europe and North Asia. These economies of scale reach beyond physical investment, to the heart of institutional competitiveness and the potential of the common market.

The need for transforming the current policies and institutional frameworks is exemplified by the CEE region. "There is a huge potential in this area. GE organized a seminar in Budapest where we were discussing the unification of the energy system of CEE in order to gain the economies of scale and create competitiveness. This was in 2007. What happened? Nothing. We repeated in 2008. What happened? Nothing." The core obstacle is not availability of funding, but the lack of common regional framework and the lack of will to invest in newest technology, not just catching-up but leading in technological capital. "...When we use these funds, let's try to use them to create the newest, most up-to-date technology, to make sure that we are not just buying technology which quickly becomes obsolete."

This is a part of addressing the European and CEE regional competitiveness challenges. "Competitiveness in Europe nowadays is represented by high level of education and by the creation of new technology, not the cost of manufacturing. When GE bought Tungsram in the late 1980s the differential in cost between Western Europe, or the United States, and Hungary was huge. Today, the reason why Tungsram can survive is because we are introducing the latest technology. Cost is not the name of the game anymore." To enhance this potential at the regional level requires re-prioritization of EU policy agenda. "The European budget today consumes a considerable percent in agricultural subsidies, which support a sector that accounts for just 3 percent of the total GDP. The new budget should be dedicated more to technology and education development." This will also benefit the CEE region, which has strong base of human capital.

The stress, placed by Mr Ferdinando Beccalli-Falco on harnessing CEE region potential in human capital, R&D and technological innovation, within the broader EU policy frameworks and budgetary supports, was complementary to the focus on institutional and 'soft' innovation (policy and business process development) raised by other speakers. These points were further expanded by Mr. Pedro Pereira da Silva the CEO of Jeronimo Martins Group who focused in his contribution on the need to see CEE region as the source of talent, creative workforce and business innovation.

"Over the last two decades we've been a part of the process of transformation in our industry and we have seen a remarkable transfer of know-how in the CEE region, massive investments and economic modernization. As an example: it took 15 years in Poland to open 350 hypermarkets; the same takes 25 years in Spain. So everything happens much faster, more dynamically, with more competition in the CEE region than in the other parts of Europe."

"As we see from the euro area experience, today we have much more risk, more uncertainty, we also are seeing slowdown in investment. You can see this as a challenge or as an opportunity." Until now, CEE countries have been focused on internal development but "the next stage will be regional consolidation in production and distribution sectors." This represents yet another, but related, regional opportunity as CEE economies become more closely integrated within the region.

Mr. Stephen Gomersall, the Chairman of Hitachi Europe took a more specific approach to the issue of regional integration - the perspective of the foreign direct investors in the region, building on the contributions by Minister Csafalvay  and Deputy Prime Minister Ivan Miklos concerning the importance of interconnecting public policies with private sector competitiveness. "...From our point of view those are key factors for bringing more investment into Europe."

Firstly, according to Mr Gomersall, although CEE countries do have a deficit in infrastructure, "they have strong macro-economic frameworks, and young and vibrant workforce. The region also has the advantage of investing in infrastructure at a time when much more sophisticated and efficient solutions are available. So you can get a much bigger effect from the investment."

Secondly, alongside the contributions from Mr. Beccalli-Falco and Mr. da Silva, Mr Gomersall said that, "from an investment perspective, growth comes from empowering the private sector. Governments play a vital role in providing the framework for national development, for regional development, and as sponsors of innovation, but there are four key factors I would mention for growth and for business. The first is a stable economic environment, the availability of credit, stable currency and a climate conducive to foreign investment. The second is a secure and stable energy supply... [with] the right mix of energy sources... The third factor - good intercity and regional transport links, ...and an efficient IT environment." In at least two of those areas, according to Mr Gommersall, policy framework and IT deployment, "Poland is already a very strong player and becoming a leader in Europe in implementing, for example, e-government technologies".

Thirdly, "new infrastructure development will require very large investments. The EU programs and structural funds are of enormous importance, but there is also the need for private finance, so projects need to be not political or social projects, but based on solid economic returns and optimal efficiency." CEE region needs "innovative methods for blending public and private finance ...to deliver public services, for example in energy and transport. ...Many of these projects are trans-national: cross-border. For example, Lithuanian's nuclear power project involves investment from four nations and a unified or at least interconnected grid. Without regional cooperation, it will be much more difficult to make this investment efficiently. So, the coordination of policies and projects at the regional level makes enormous sense."

Regional policy and investment platforms

Overall, the panel was in consensus on the need for developing more competitive economic models, including regional models, especially in the areas of human capital and services. The question that remained is whether the CEE can act as a functional regional platform for competitiveness and innovation-supporting technologies and best practices.

Mr Gomersall referred to the specific example of Poland that shows the intrinsic resources available within the CEE region that can be used to drive both the policy dimension of stimulating competitiveness and for merging investment and technology platforms to deliver on regional objectives. "It's well known that the level of scientific education in Poland is high, and therefore the propensity in Poland to adopt new technology solutions is also high. We've been working with a number of government and private partners here in Poland for the development of biometric technologies. These are means of ...ensuring the security of business transactions, and transactions between the government and citizens online. Poland has actually proven to be the most fertile ground for the development of these technologies EU-wide." Mr. Ferdinando Beccalli-Falco added that from GE experience, "the human capital is  already here, [in the CEE region, and] the tradition for the development of technology is here."

Mr. Zoltan Csefalvay pointed out that despite the demand for the latest technological investments in the area of infrastructure in the CEE region, little funding is available in these areas. "If you look at the future financing period 2014 to 2020, there is an EU-wide investment facility for infrastructure development and transport development. Of 49 transportation projects identified under this, only two are related to Hungary." The lack of prioritization of CEE regional investments by the EU implies the need, according to Mr Csefalvay, "to place Central and Eastern Europe in the centre of the European debate."

The central issue is how can CEE translate the points of national excellence to a regional framework? Can focusing on the more specific areas for investment such as, for example, energy or infrastructure or healthcare reshape the regional framework for development and avoid the differentiation between local competition and regional competition and global competition. According to Mr Beccalli-Falco, "the initiative to create a unified regional energy system" is a strong positive. "Where we find a roadblock is in the political will to do it. I am afraid there is not enough vision to understand the advantages that such a system could bring."

Mr Pedro Pereira da Silva focused on the three key concepts that, in his view, will drive regional growth within the CEE and indeed across Europe. "Innovation, efficiency and competition for me are the three key words we need to focus on in the EU". For CEE states "a key point, is that extra effort is needed on the education side to support talent capital, which really makes a difference."

Mr. Gomersall echoed these views while focusing more on specific example of large scale regional infrastructure integration in transportation systems: "Obviously EU funds and national development funds are limited and therefore it's important to ensure that they are used in the most efficient manner for the future development ...and not just for social stabilisation. ...[However] the volume of new capital coming in from the private sector, particularly from the United States, Japan, China, South Korea, etc, is far in excess of the funds from the European Union. So, the key point is really to create a climate which will continue to attract that investment and make it profitable, and that includes, obviously, taking further steps on the single market and deregulation."

Mr. Beccalli-Falco concluded the panel discussion with a comment summing up the core areas for investment and policy development at the regional levels, mentioned by other speakers: "I'd like to say that my three concepts, are: continue to focus on education, full utilisation of the European funds, and support foreign direct investments, which, as was said by others, are much bigger than what is contributed by Europe. If we can combine these three things together, I think that Central and Eastern Europe is going to become a highly productive, highly competitive area in the world."

06/09/2011: Euro area 2Q 2011 GDP analysis

Euro area GDP increased by 0.2% qoq in 2Q 2011, same rate as GDP growth in EU27, according to second estimates released by Eurostat. 1Q 2011 respective growth rates were +0.8% in the euro area and +0.7% in the EU27. Year-on-year, GDP was up 1.6% in the euro area and 1.7% in EU27 in 2Q 2011, down from annual growth rates of 2.4% (both EU27 and euro area) for 1Q 2011.

US GDP also grew 0.2% qoq in 2Q 2011 up from +0.1% in 1Q 2011. Year-on-year US GDP expanded by 1.5% in 2Q 2011 and 2.2% in 1Q 2011. Japan's GDP contracted 0.3% in 2Q 2011, following -0.9% contraction in 1Q 2011. Year-on-year Japan's GDP fell 0.9% in 2Q 2011 and fell 0.7% in 1Q 2011.

Components of GDP:

• In 2Q 2011, household consumption fell 0.2% in the euro area and 0.1% in EU27. In 1Q 2011, the respective numbers were +0.2% and +0.0%.
• Gross fixed capital formation was up 0.2% in 2Q 2011 in the euro area (+1.8% in 1Q 2011) and up 0.4% in EU27 (+1.2% in 1Q 2011).
• Exports were up 1.0% (+2.0% in 1Q 2011) in the euro area and +0.6% (+2.2% in 1Q 2011) in the EU27 (after +2.0% and +2.2%). Imports rose by 0.5% in the euro area (+1.5% in 1Q 2011) and by 0.4% in the EU27 (+1.4% in 1Q 2011).
  

Table below summarizes some of the results.

In terms of Gross Value Added in q/q terms:

• Agriculture, hunting & fishing contracted by -0.2% in 2Q 2011 (against +0.6% in 1Q 2011) in the euro area and contracted -0.5% in EU27 (+0.9% in 1Q 2011)
• Industry, including energy expanded by 0.4% in 2Q 2011 (against +1.7% in 1Q 2011) in the euro area and +0.3% in EU27 (+1.4% in 1Q 2011)
• Construction expanded by 0.0% in 2Q 2011 (against +2.5% in 1Q 2011) in the euro area and +0.3% in EU27 (+1.5% in 1Q 2011)
• Trade, transport and communication services expanded by 0.2% in 2Q 2011 (against +0.6% in 1Q 2011) in the euro area and +0.4% in EU27 (+0.7% in 1Q 2011)
• Financial and business services expanded by 0.2% in 2Q 2011 (against +0.2% in 1Q 2011) in the euro area and +0.3% in EU27 (+0.2% in 1Q 2011)
• Other services expanded by 0.2% in 2Q 2011 (against +0.2% in 1Q 2011) in the euro area and +0.2% in EU27 (+0.4% in 1Q 2011)
• Total gross value added expanded by 0.2% in 2Q 2011 (against +0.7% in 1Q 2011) in the euro area and +0.3% in EU27 (+0.7% in 1Q 2011). In annualized terms, total GVA expanded 1.6% in 2Q 2011 (against 2.2% in 1Q 2011) in the euro area and by +1.7% (against 2.2%) in the EU27.
  

If you think we are in the age of austerity, think again. Government expenditure contributions to GDP, seasonally adjusted series, stood flat in 2Q 2011 at +0.0% growth (against +0.1% in 1Q 2011) in the euro area and in the EU27. Annualized rate of increase for Government spending was +0.1% in 2Q 2011 (+0.2% in 1Q 2011) in both the euro area and the EU27.

Now, on to forecasts forward. Chart below plots updated series for GDP growth against the leading economic activity indicator eurocoin. The series suggest that Euro area GDP for 3Q 2011 consistent with July-August readings of eurocoin is 0.3% (unadjusted for 2Q realization) and adjusting for 2Q 2011 realized rates of growth, the forecast is in the range of -0.1% to +0.1% GDP change.

31/08/2011: Europe's economic, business & consumer confidence sink in August

Following a precipitous collapse of the US consumer confidence this month (see posts here and here for details), the EU has just posted a series of consumer, business and economic sentiment indicators that are showing a massive drop in overall economic activity across the board. Here are the details.

Starting with Economic Sentiment Indicator (ESI) first:

• August ESI reading for EU27 came in at 97.3 (contraction territory) down from July 102.3. 3mo MA for the index is now at 101.4 and yoy the index is down 5.7%.
• Euro area ESI is also in contraction zone at 98.3 for August, lowest since May 2010, down from 103.0 in July and off 3.8% yoy. 3mo MA of the series is now at 102.2.
• ESI for Germany is still in expansion at 107.0 in August, but down from 112.7 in July and down on 3mo MA of 111.4. The index is now down 3.1% yoy. This is the lowest reading since July 2010.
  
• ESI for Spain is showing deeper contraction in August, reaching 92.7, down from July 93.0 and registering uninterrupted contractionary performance since (oh, sh**t) September 2007. ESI, however is up in Spain yoy by 1.6%.
  
• ESI for France latest reading is at 105.9 for July, which was down from 107.4 in June.
• ESI for Italy signals recession at 94.1, down from 94.8 in July and off 4.8% yoy. 3mo MA is at 96.1 and the index has remained in contraction zone for consecutive May 2011.

Two charts to illustrate - one of complete historical series, and one of a more recent snapshot:
What the historical series show is a worrisome trend:

• Before January 2001, Euro area average ESI reading was 102.1, post-introduction of the Euro, the average reading is 98.9. This implies a swing from shallow expansionary optimism in pre-Euro period average, to a shallow pessimism in post-Euro introduction period.
• In Germany, prior to 2001, the average ESI was 103.9 and post January 2001 the average stands at 98.0
• In Spain, prior to 2001, the average ESI was 101.9 and post January 2001 the average stands at 98.7
• In France, prior to 2001, the average ESI was 99.4 and post January 2001 the average stands at 101.9 - the only major economy to buck the trend
• In Italy, prior to 2001, the average ESI was 101.5 and post January 2001 the average stands at 99.5

Next, consider the Consumer Confidence Indicator (CSI):

• CSI for the EU27 has fallen from -12 in July to -17 in August, the lowest reading since September 2009 and well below 3mo MA of -13.4. In August 2010 index stood at -11.
• CSI for Euro area is also at -17 in August, down from -11 in July.
  
• August reading is the lowest since June 2010, as Euro area consumers are generally less optimistic than the EU27 average. EU27 average historical reading is -11.1 and Euro area average historical reading is -12.0. Prior to January 2001 the historical averages were: -10.7 for EU27 and -11.3 for Euro area. post-introduction of the Euro, average historical readings are now at -11.7 for the EU 27 and -13.1 for the Euro area, suggesting that the Euro introduction was not exactly a boost to consumer confidence in either the EU27 or in the Euro area.
  
• Germany's CSI came in at +0.5 in August, down from 1.4 in July. The index is now well below 3mo MA of 1.1 but is well above -3 reading attained a year ago.
• Spain's CSI is now at -17, down from -13.4 in July and below 3mo MA of -14.1. In August 2010 the index stood at -19.8, so there has been a yoy improvement in the degree of consumer pessimism.
• France's CSI stands at -18.4 (recall that France is the only large Euro area economy with strong focus on consumer spending) in July (latest data), down from 17.60 in June and an improvement on -25.8 yoy.
• Italy's CSI is reading at -28.8 in August, down from -27.4 in July, down on -26.6 3moMA and well below August 2010 reading of -21.3.

Again, two charts to illustrate:

Some historical trends concerning the Consumer Confidence Index:

• As noted above, consumer confidence had shifted, on average, from cautious optimism in pre-Euro era to cautious pessimism since January 2001.
• In Germany, before January 2001, consumer pessimism (average) stood at -7.26. Post January 2001, the average pessimism became deeper at -10.83. In effect, then, that 'exports-led' economic growth model for Germany has meant the wholesale historical undermining of consumer interests.
• In Spain and Italy, the picture of long-term historical trends is identical to Germany, with levels of pessimism being higher than in Germany across entire history.
• In France, consumer pessimism in pre-2001 period stood, on average, at -19.36 - deeper than in other Big 4 EU economies. Post 2001, average pessimism actually declined to -16.94, still the heaviest level of pessimism (on average) across the Big 4 economies.

Lastly, consider Business Confidence Indicator (BCI):

• EU27 BCI has fallen from +0.1 in July to -2.50 in August, hitting the lowest reading since July 2010. The index is now down compared to +0.17 3mo MA and is below -2.10 reading in August 2010.
• Euro area BCI has declined from +0.90 in July to -2.90 in August, behind +0.5 3mo MA. A year ago, BCI reading was -2.60, making current reading the lowest since July 2010.
• Germany's BCI has declined from +9.60 in July to +4.60 in August, behind +8.67 3mo MA. A year ago, BCI reading was +3.80, making current reading the lowest since September 2010.
• Spain's BCI remained unchanged in August at -13.90, behind +-12.27 3mo MA. A year ago, BCI reading was -13.0, making current and previous month readings the lowest since June 2010.
• France's BCI has declined from +5.10 in June to +0.8 in July (latest data), making the latest reading the lowest since December 2010.
• Italy's BCI has declined from -4.50 in July to -4.80 in August, behind -3.93 3mo MA. A year ago, BCI reading was -7.0.

Historically:

• Business confidence readings averaged -5.62 across the EU27 in pre-2001 period, and have since then fallen to -6.77 average reading for the period post-2001. BCI for the Euro area averaged -5.60 in pre-2001 period and -6.23 in post-2001 period. This, again, shows that the introduction of the Euro did not have a positive effect on business confidence.
• In Germany and Italy, pre-2001 BCI averages were better than post-2001 averages, while in Spain there was an improvement in the levels of business pessimism post-2001. In France, pre-2001 average BCI was -6.59 and post-2001 average BCI is -6.41 - implying statistically identical readings.
  

15/01/2011: EU's claim to fame in 2010

I promised some time ago to post on EU's marvelous youtube video (here) which talks about all the things that the EU allegedly did for its citizens in 2010 (hat tip to the OpenEurope.org).

As you would notice - watching the official video - there some pretty good things that the EU delivered in 2010, although many of these, such as the EU work in the areas of justice are long running themes. But one cannot avoid several absolutely ludicrous claims.

Here's the biggest whooper:
One doesn't need a PhD in Finance or Economics to understand that 2010 was the year of:

• Jobless and anemic recoveries across a number of EU states;
• Continued recession across a number of other EU states;
• Acute and still ongoing crisis in sovereign debt markets; and
• Virtually EU-wide austerity marking the unsustainable nature of European economic model

Actually, one only needs to read through EU-own flagship policy document from 2010 - Europe 2020 (here) - to see that (quoting from the preamble):
"2010 must mark a new beginning... The last two years have left millions unemployed. It has brought a burden of debt that will last for many years. It has brought new pressures on our social cohesion. It has also exposed some fundamental truths about the challenges that the European economy faces. And in the meantime, the global economy is moving forward... The crisis is a wake-up call, the moment where we recognise that "business as usual" would consign us to a gradual decline, to the second rank of the new global order. This is Europe's moment of truth."

So if anything, per EU own admission, the crisis is not over and for EU, the wake-up call from the crisis is yet to arrive. Note that what Europe 2020 refers to the 'moment we recognize the business as usual would consign us to a gradual decline' as timed beyond June 2011 when the Commission expects European Parliament's and Member States approval of its agenda.

But here's EU Commission own assessment of EU's progression toward 'securing a sound economy' - quoting directly from Europe 2020:

• Europe's average growth rate has been structurally lower than that of our main economic partners, largely due to a productivity gap that has widened over the last decade. Much of this is due to differences in business structures combined with lower levels of investment in R&D and innovation, insufficient use of information and communications technologies, reluctance in some parts of our societies to embrace innovation, barriers to market access and a less dynamic business environment.
• In spite of progress, Europe's employment rates – at 69% on average for those aged 20-64 – are still significantly lower than in other parts of the world. Only 63% of women are in work compared to 76% of men. Only 46% of older workers (55-64) are employed compared to over 62% in the US and Japan. Moreover, on average Europeans work 10% fewer hours than their US or Japanese counterparts.
  
• Demographic ageing is accelerating. As the baby-boom generation retires, the EU's active population will start to shrink as from 2013/2014. The number of people aged over 60 is now increasing twice as fast as it did before 2007 – by about two million every year compared to one million previously. The combination of a smaller working population and a higher share of retired people will place additional strains on our welfare systems.

So no sight of 'secured sound economy' in sight here. And as far as financial markets go, here is an article summarizing the four scenarios for the Euro that FT Deutschland published last month. You judge if having any one of the four outlined by the FT:

• Continued crisis, or
  
• A de jure and de facto two speed Europe, or
• A break up of the EU into two blocks precipitated by a Lehmans-like event in European sovereign debt markets, or
• A total collapse of the Euro

constitute a 'secured stronger financial market'.

Now on to the second most outlandish claim made in the video:
The very same - yet to be fully approved and implemented - Europe 2020 agenda is focused heavily on the need to:

• create new jobs and
• boost small businesses

If this was already achieved by the EU in 2010 as Commission video claims, why, may I ask, should the EU worry enough about these objectives to plan to deliver on them by 2020?

Here's what Europe 2020 says: "Europe must act:

• Employment: Due to demographic change, our workforce is about to shrink. Only two-thirds of our working age population is currently employed, compared to over 70% in the US and Japan. The employment rate of women and older workers are particularly low. Young people have been severely hit by the crisis, with an unemployment rate over 21%. There is a strong risk that people away or poorly attached to the world of work lose ground from the labour market.
  
• Skills: About 80 million people have low or basic skills, but lifelong learning benefits mostly the more educated. By 2020, 16 million more jobs will require high qualifications, while the demand for low skills will drop by 12 million jobs. Achieving longer working lives will also require the possibility to acquire and develop new skills throughout the lifetime

Does the above quote suggest that in 2010 the EU has 'created new jobs'? Not really.

Here's Eurostat's latest data release: "The euro area (EA16) seasonally-adjusted unemployment rate3 was 10.1% in November 2010, unchanged compared with October. It was 9.9% in November 2009. The EU27 unemployment rate was 9.6% in November 2010, unchanged compared with October. It was 9.4% in November 2009." So recap - through November, 2010 marked a yar of rising unemployment across the EU and the Euro zone. What 'new jobs created'?

Eurostat puts some more real numbers on the EU claim: "Eurostat estimates that 23.248 million men and women in the EU27, of whom 15.924 million were in the euro area, were unemployed in November 2010. Compared with November 2009, unemployment rose by 606 000 in the EU27 and by 347 000 in the euro area." So year on year, some 606,000 jobs were destroyed on the net across Europe, not 'new jobs created'.

Here's the chart:
But may be, just may be the EU did deliver on some other economic performance indicator in 2010?

How about inflation? Eurostat again: "Euro area annual inflation was 2.2% in December 20102, up from 1.9% in November. A year earlier the rate was 0.9%. EU annual inflation was 2.6% in December 2010, up from 2.3% in November. A year earlier the rate was 1.5%." Oops.

External trade? Eurostat nails it: "The first estimate for the November 2010 extra-EU27 trade balance was a €14.7 bn deficit, compared with -7.3 bn in November 2009 [worsening deficit on trade account year on year]. [and also worsening trade account month on month] In October 2010 the balance was -7.9 bn, compared with -6.4 bn in October 2009. In November 2010 compared with October 2010, seasonally adjusted exports rose by 0.3% and imports by 6.1%."

But wait - what about growth? Eurostat: "In comparison with the same quarter of the previous year, seasonally adjusted GDP rose in the third quarter 2010 by 1.9% in the euro area and by 2.2% in the EU27, after +2.0% in both zones in the second quarter." So yes, growth returned, but it was extremely anemic and what's worse - in the Euro area it has deteriorated in Q3 2010 relative to Q2 2010. At any rate, the Commission can't relaly make any claims about 2010 growth because the numbers for Q4 are not in yet and Q3 numbers are still provisional.

"Stop", you shout - "they made a claim about small businesses boost - address that!" Can't and neither can the EU Commission, since

• Eurostat's latest data on "SMEs - Annual enterprise statistics broken down by size classes - industry and construction" only covers year 2008.
• Eurostat's latest publication on SMEs development in Europe, dates back to 2009 and - per it's title - covers SMEs were the main drivers of economic growth between 2004 and 2006
  

Notice that the database for SMEs page was last updated by the Eurostat on 14.10.2010. And that's despite EU Commission setting strategic priority in early 2010 to significantly increase growth amongst SMEs in 2011-2020.

In other words, the EU's claim of boosting small business in 2010 is, folks, non-falsifiable, or translated from the philosophy of science language - pure fiction.

As an indicator strongly instrumental for SMEs, let's take a look at entrepreneurship. Here is a useful link to OECD analysis, conducted jointly with Eurostat.

Couple of charts from November 2010 OECD publication on the topic (notice these cover data through Q2 2010):
Clearly, with exception of the UK and Denmark, no EU country posted an increase in entrepreneurship rates in 2010.

And for the laughs, here's No Comment claim to EU fame
Now, we are truly saved!