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Daily Commentary: On huge growth disparities in the developed economies

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We see a number of data points in today’s links that point to economic growth and employment dynamics that vary widely across the developed economies. Yesterday, I showed you the chart of the day on this, which highlighted Greece’s predicament, joined by Ireland and Italy. The US started as the worst performer but quickly corrected course in March 2009, due in my view to economic stimulus. Look at the kink in the economic trajectory at the March 2009 point. Greece, on the other hand shows a massive kink downward at about April 2010 when they received their first bailout in exchange for austerity. I think the implication here is clear: over the medium-term austerity leads to recession and stimulus can change a recessionary trend. I won’t make any more conclusions than that, especially as they pertain to the longer term.

Below are a few more data points on the month-to-month developments. Notable are the following:

  • United States: The U.S. unemployment insurance weekly claims report showed a 4-week average of 355,000 initial jobless claims. This is significantly lower than a year ago and nowhere near indicating a recession is imminent, quite the opposite.
  • Australia: The growth slow down there is especially rapid because of China’s slow down. The economy grew 0.4% in Q4 2011, which was well below expectations. The property bubble is also coming off the boil. Right now, the Australians expect 3ish% growth. But if China fails to even meet its reduced 7.5% growth target, that spells trouble for commodities and Australia’s economy. The property bubble will then burst in a very negative way.
  • Germany: German industrial orders fell 2.7% in January, suggesting that there is lingering weakness in the German economy due to contagion from the economic pain in the periphery and the anti-growth economic policies of the euro zone. That said, German youth unemployment is still a very admirable 7.8% while half of Spain and Greece’s youth are unemployed. Germany is still doing relatively well.
  • Greece: The depression continues in Greece with a record 51.1% youth unemployment rate. The overall unemployment rate is now 21%, almost as high as in Spain, and an improvement is nowhere on the horizon. The economy in Greece will continue to contract – and I see no way they can remain in the euro zone under these conditions.
  • Spain: This is where the rubber hits the road. Industrial production fell another 2.4% in Spain as austerity takes a toll. I like to compare Spain and Ireland because both economies had large property bubbles and from a policy response, the Irish have been much more aggressive, both in terms of imposing austerity and in terms of writing down bank bad debts. The result so far has been more economic pain in Ireland than in Spain. Yet Spain is still in a world of hurt with the highest euro zone unemployment rate. Mariano Rajoy, the prime minister, has finally said no and decided to let Spain’s targets slip (as I predicted would happen in October). As Paul Krugman points out, let’s remember that Spain didn’t get into this mess through fiscal irresponsibility: "Martin Wolf points out that in real time the IMF judged ]Spain’s government] surplus structural."

Let me riff on this a bit more because Krugman is picking up on something Wolf and I have argued before about Spain’s non-existent fiscal problems. Here’s what I wrote in May 2010 about the so-called structural surplus in Spain:

I just wrote about how hollow this song and dance about German fiscal prudence is. Read "Spain is the perfect example of a country that never should have joined the euro zone." What’s key in this is an understanding that the Spanish and the Irish were subjected to what for the Germans was an adequate monetary policy. But for the Spanish and the Irish it was highly inflationary, both in terms of asset prices and labor costs.  I can see the leaders last decade, Bertie Ahern and José María Aznar now:

Citizens, we are running budget surpluses right now. And the economy is booming. But, I intend to commit political suicide because I recognize there is an asset bubble forming which will cause our surplus to turn into double-digit deficits in no time.  Therefore, I am asking the legislature to tax you more so that we can forestall this problem.  Moreover, I want to ask you workers to take pay cuts now so that you don’t have to later.

I hope that sounds about right because that is the only thing the Spanish and Irish could have done, locked into the currency union as they were.

-Beggar thy neighbour: Martin Wolf is singing from my songbook

There is ZERO chance that Spain could have prevented the private sector debt binge that resulted from the euro and the euro zone’s German-centric monetary policy. The same goes for Ireland. Remember, the IMF was calling the Spanish surplus structural.

My point?

Spain (and Ireland) had a budget surplus and low government debt before the crisis. Spain (and Ireland) saw Maastricht Treaty compliance while France and Germany were over on both the deficit and debt to GDP hurdles. That tells you this crisis is not a government debt crisis. It’s a balance of payments crisis – and it can’t be fought off with austerity alone. It is no-win situation for Spain and the EU. The EU has laid down the law and just because Spain has been a model before the crisis and during the IMF program doesn’t mean they can get special treatment. We know from Germany and France breaking the 3% hurdle that what’s good for the goose is good for the gander. So now we are likely to see a response from the EU that is anti-growth and makes things worse.

Bottom line: the EU is in a policy cul-de-sac. The whole austerity fixation is wrong-headed and creates these no-win policy dilemmas. It will only get worse until they realise it is not a government debt but a private debt and balance of payments problem.

The way I see it the periphery’s only hope is private sector defaults and an economic reboot after those debts have been written down. You have countries like the Netherlands also now undergoing austerity because otherwise they too will miss the 3% hurdle in 2012. There is no balance of payments change coming to the euro zone.

I say watch Spain because this is where the most important events in the EU are now taking place.

One more thing: The article below on Sarkozy’s anti-immigrant rhetoric shows you that a depressed economic environment does have mainstream parties taking on a bit of the rhetoric of the extreme parties and factions. Yesterday, the tone of my piece on the Netherlands and Wilders made it seem like I was denying this was so. But it is true as much in the Netherlands as it is in France. What I wanted to highlight yesterday is that Geert Wilders’ desire to have the Dutch leave the euro is such an extreme position now that he can have no influence on that issue. On cultural and social political issues, he can and does have influence. The tide of nationalism does make extreme views more palatable as I have been saying for quite a while.

P.S. – I will be on RT’s Capital Account at 430PM ET. Tune in.

That’s it. Here are the links.

  • German industrial orders fall sharply – FT.com

    A 2.7 per cent drop in orders compared with December, reported on Wednesday by the Berlin economics ministry, highlighted the vulnerability of Europe’s largest economy to global growth prospects and a possible significant slowdown in countries such as China. December had seen a 1.6 per cent rise.

  • Jeder zweite junge Grieche ohne Job – Griechenland in der Krise – derStandard.at › Wirtschaft

    Die Schuldenkrise trifft vor allem junge Griechen immer härter: Erstmals sind mehr Jugendliche arbeitslos als berufstätig. Die Arbeitslosenquote bei den 15- bis 24-jährigen kletterte im Dezember auf den Rekordwert von 51,1 Prozent, wie das Statistikamt mitteilte. Vor drei Jahren war sie nur halb so hoch.

  • The tortured life of Mrs Helmut Kohl – Europe – World – The Independent
  • So, Eric Holder, we should just trust that the president won’t assassinate us? | Jonathan Turley | Comment is free | guardian.co.uk

    That, in effect, is the pledge the Obama administration’s attorney general says has replaced our constitutional protections

  • Finally, Spain – NYTimes.com

    I’ve always viewed Spain, not Greece, as the quintessential euro crisis country. With Rajoy’s government balking – rightly – at further austerity, the focus is now where it arguably should have been all along. And with Spain now front and center, the essential wrongness of the whole European policy focus becomes totally apparent. Spain did not get into this crisis by being fiscally irresponsible

  • Griechische Arbeitslosenquote bei 21 Prozent – Griechenland in der Krise – derStandard.at › Wirtschaft
  • FT Alphaville » The Eurozone youth of today

    compare and contrast a few youth unemployment rates for specific countries: Germany 7.8 per cent, Austria 8.9, The Netherlands 9.0, Spain 49.9, Greece 48.1.

  • La producción industrial cae el 2,4 % en enero – CincoDías.com

    El índice de producción industrial (IPI) cayó el 2,4 % en enero respecto al mismo mes de 2011, más de cuatro puntos porcentuales por encima de la tasa registrada en diciembre, según ha informado hoy el Instituto Nacional de Estadística (INE).

  • The Koch Brothers, The Cato Institute, And Why Nations Fail | The Baseline Scenario

    The interests that would undermine government are strong and growing stronger, with rich individuals leading the charge.

  • Felix Salmon smackdown watch, banking-conflicts edition | Felix Salmon

    the most sought-after bankers are those with the best connections to (and deepest relationships with) potential buyers. Since it’s basically impossible for a banker to develop strong relationships with a buyer without having some sort of conflict (say having formerly worked for potential buyer in a previous engagement), we shouldn’t be at all surprised that the most conflicted bankers are often the most sought after by clients.

  • On Andrew Schiff’s "Middle Class Lifestyle" in New York City « naked capitalism

    someone "middle class" in the 1980s would have been very unlikely to raise kids in the five boroughs (Schiff and Salmon really mean upper middle class). The city was not considered safe for children. When I first came to Manhattan, pretty much everyone I knew who did not live in a doorman building had had an apartment break-in. I had my wallet stolen on two occasions in 1987. The subways were gross and no woman would dare ride them wearing real or real-looking jewelry (gold chain snatchings were a regular occurrence).

  • Sarkozy says ‘we have too many foreigners’ in France | The Raw Story

    President Nicolas Sarkozy declared on Tuesday that there are too many immigrants in France, as the country’s presidential election campaign became caught up in issues of religion and identity.

  • BBC News – Australia’s economy expands 0.4% in the fourth-quarter

    Australia’s economy has expanded by less than expected in the fourth quarter of 2011, as business spending dropped, sending the dollar to a six-week low.

  • And the losers from Greek CDS contracts are… German – Telegraph Blogs

    Unicredit and smaller German banks may have a problem. But that has no macro-economic importance. German savers will transfer a little extra money to nimble-footed funds around the world.

  • FT Alphaville » Dennis Gartman and the goldbugs

    We’ve no allegiance to gold and indeed we are agnostic, just as we’ve no allegiance to soybeans ot to shipping stocks or to copper or to farm land.

  • FT Alphaville » Reflections on the crisis, thus far…

    likely the best Sovereign policy post crisis is to devalue, slowly cut your budget deficit and allow your Central bank to have licence to intervene at will

  • About 

    Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.