This page has been archived and commenting is disabled.
Europe This Week: Commentary From Erik Nielsen
Happy thoughts from Goldman's Erik Nielsen
Happy Sunday,
For the first time this year I am writing to you from my backyard here in Chiswick; the weather is impeccable and I couldn’t think of a place I’d rather be right now. A good cup of Nespresso certainly contributes to my well-being this morning, but more on that later. Here’s my view of Europe right now:
- It’s been another week of good real-economy numbers but with terrible markets.
- Specifically, last week saw another batch of good growth indicators in the Euro-zone, including the PMIs.
- Implementation of the Euro-zone’s mega-package is moving ahead; ECB continues its interventions in the sovereign debt market while policy measures are being rolled out.
- The battle lines for future policy coordination (“economic governance” to the devoted) are being drawn; we are in for a long haul here.
- Germany approved its share of the EUR440bn SPV. Not much risk from here; I think it’ll be operational by the end of June.
- Bank of Spain took over a small mortgage bank which refused the planned merger with a bigger bank.
- The Swiss National Bank published numbers showing continued significant fx interventions in April.
- This coming week we’ll look for further progress in the approval of the EUR440bn SPV.
- On the data side in the Euro-zone, we’ll get (presumably) good confidence indicators from France and Italy.
- The UK is set to publish the second estimate of Q1 GDP; we expect a small further up-revision to 0.3%qoq.
- Switzerland is set to print another strong Kof number on Friday,
- Sweden is expected to print +1.2%qoq non-annualised Q1 GDP growth also Friday.
- In Central Europe, we’ll get the Polish rate decision on Tuesday (no change) and Czech elections on Friday and Saturday.
- We are through another week in the battle between an increasingly well functioning – if still fragile - real economy and financial markets spooked by a combination of concern about future growth and - as my boss Jim O’Neill has pointed out – a series of uncomfortable policy statements around the world with respect to restrictions, regulations and taxation of the financial markets. Our central scenario for Europe remains one in which continued growth in the real sector (combined with the further implementation of good policy measures) will stabilise financial markets leading to a restoration of some (new) level of normality. The key risk to this outcome is one in which dysfunctional financial markets stay with us so long that they’ll eventually strangle the real sector recovery. My best guess would be that the real economy has another 3-6 months to convince financial markets that
fundamentals are indeed improving before continued frozen credit channels would begin to sink the real sector back into recession. - Last week saw further indication of the good European recovery. Much was made of the decline in Friday’s Euro-zone manufacturing PMI for May (55.9 after 57.6 in April), although the services PMI increased to 56.0 from 55.6. But did anyone really think that we were going to remain at the PMI levels from March and April– numbers which are consistent with annualised GDP growth of 3.0%-3.5%? Surely, we didn’t correctly guess the timing of the flattening, but nobody could doubt that it was going to happen sometime, and mostly likely this spring; Germany was at a record high for manufacturing in April! And there is probably still more to come; the May numbers are pointing to annualised GDP growth of about 2.8% in the Euro-zone, which is about double our forecast for 2010. The more important news than the overall decline was the still strong level and the fact that the employment indicators pointed to job creation for the first time in two years – looking like a pretty good recovery to me. Then there was the Ifo which fell marginally to 101.5 (from 101.6), and while general expectations were easing and the retail component declined (a concern, indeed, but who didn’t know Germans are reluctant shoppers), manufacturing showed further increase in confidence.
- Implementation of the Euro-zone mega package is moving ahead. Remember that there are four components to the package: (a) the ECB’s interventions in the sovereign debt market; (b) policy reforms in the individual countries to restore fiscal sustainability and growth; (c) tighter policy coordination going forward; and (d) a 3-year EUR500bn rescue package, including an EUR440bn SPV (all possibly supplemented by EUR250bn from the IMF). First, the ECB announced early last week that they had spent EUR16bn on purchases during the first few days of the program; I suspect that they have spent another EUR15-20bn since then; still peanuts in the bigger scheme of things. Second on policy adjustments, French president Sarkozy imposed restrictions on all tax measures to the Finance Bill (or revisions thereof) thereby eliminating ministers’ ability to attach loopholes on the revenue side to other legislation. Its part of the big constitutional plan, but the current government will apply it immediately. Maybe more prominently reported, Sarkozy also announced plans to introduce legislation – to be enshrined in the so-called “Fundamental Law” - obliging governments to start a process of balancing the budgets from 2012, but details here remain vague and discussions with the opposition will start only after summer.
- Third, policy coordination is a big-ticket item and one that’ll be with us for a long time. I outlined the Commission’s proposal last weekend, and the Ecofin has been hard at work since. The lines are still being drawn up between the countries; I predict that we are in for an epic battle between the traditional net payers and net recipients of cash within Europe (at least those who haven’t weakened their negotiating positions due to the crisis.) German finance minister Schaeuble has distributed a nine-point plan, which includes procedures for an orderly state insolvency mechanism. Meanwhile, a number of prominent Italians, including former PM and Commission president Prodi and former finance minister and ECB GC member Padio Schioppa, have become increasingly vocal in their call for the introduction of fiscal federalism in which – ultimately – tax revenues will be shared to a larger extent between member states. Needless to say, anything more than a gentlemen’s agreement (supported by peer pressure – not to be underestimated in the present environment) would require a change of the treaty, so we are in for a very long haul here.
- Finally, the fourth component – the SPV – is moving closer. The German parliament approved the German share of EUR123bn on Friday. In the end it passed with a very comfortable majority, but - apparently triggered by doubt about its passing on Tuesday - the government announced unilateral and immediate (if temporary) ban on various types of shorts, which yet again knocked over financial markets. My guess is that the SPV will be fully approved and the practical details sorted out around the end of June. At that stage, if a Euro-zone member should face problems funding itself in the commercial market, it can apply for a loan from the SPV. Such an application would trigger negotiations on policy conditionality (like an IMF loan), and when agreed, the SPV would raise the necessary funds in the market against the guarantees (pro rata), and money would be disbursed in tranches following a decision by qualified majority by the European Council. I presume that this would happen in tandem with an IMF loan. In my opinion, this will be a powerful mechanism that ought to provide a lot of comfort to the market.
- One of the most discussed topics among investors these days is the European banking system, and particularly the Spanish one. Unfortunately, many discussions are flavoured by limited information and general distrust of the publicly available data. In reality, of course, the Spanish bank restructuring plan is moving ahead, and while one could always wish for more speedy operations, there are – fortunately - processes which need to be followed when governments interfere in the private sector. In the case of Spanish bank restructuring, the European Commission postponed the deadline until the end of September by when all cajas in need will have to submit their restructuring or merger plans, but three weeks ago PM Zapatero and the leader of the opposition agreed to speed up the process and bring the deadline forward to the end of July. And for the really serious cases, action is taken earlier, as illustrated by this weekend’s takeover over of Cajasur by the Bank of Spain. Cajasur is a small savings bank operating in Andalucia with just 0.6% of the banking system’s assets, so it should have no implications for financial stability. The problems in Cajasur were identified long ago and the authorities had been pressing for a merger with Unicaja, a much bigger institution. The take-over came after Cajasur finally rejected the merger on Friday; the FROB (the fund set up to shore up the capital base of the weaker banks) has been appointed as manager.
- The Swiss National Bank has long intervened to prevent unacceptable appreciation of the CHF. This past week they released their balance sheet for April, showing a stunning 23% increase in the line-item quantifying their foreign currency investments; that’s an indication of some CHF29bn in interventions in April to stem the fx appreciation. As the SNB have accumulated considerable fx-denominated assets on their balance sheets, needless to say, they have exposed themselves to financial risks, something some investors seems almost obsessed about when it relates to the ECB’s recent (and more modest) asset purchases, but which is seldom discussed in the case of the SNB’s fx interventions. For a discussion of the financial risks associated with the SNB’s interventions, see Dirk Schumacher’s piece in the European Weekly Analyst three weeks ago. (Incidentally, the upward pressure on the CHF brings me back to my lovely Nespresso; now long consumed. If you sell quality products, then there are plenty of hungry (and thirsty) consumers out there – and Switzerland is far from the only European country with the luxury of an export basket with great pricing power. )
Moving to this coming week:
- We’ll keep a close eye on the further progress with respect to the national approvals of the SPV, although we do not think there is any measurable risk of it not being passed in all the major countries. As far as I know, it is not yet on the parliamentary agendas in France or Italy, and the Spanish government says that it has requested more details from the Commission before they’ll submit it for a vote. The Netherlands have approved their share already.
- This coming week should bring further evidence of the growth recovery – in the shape of some important confidence indicators for May. In Italy, the ISAE survey of business confidence will surface on Tuesday (we expect a slight increase from 85.5 to 85.8, (EMEA-MAP relevance 4)). In France, the analogous INSEE survey (Wednesday) should register a small decline, to 96, after an outsized gain the previous month (EMEA-MAP 2). For the consumer confidence counterparts of these surveys (due out on Tuesday in Italy and on Wednesday in France, EMEA-MAP 1 and 2 respectively), we expect minor improvements. Also, German states will start to release their May CPI prints this coming week and we should have country-wide preliminary estimate on Thursday: we look for +0.1%mom and +1.2%yoy, after +0.9%yoy. Spain will also publish its flash CPI on Friday: we see it at 1.7%yoy, after 1.6% in April.
- There is only one release of note this coming week in the UUK, namely the second estimate of Q1 GDP on Tuesday. We expect an upward revision to 0.3%qoq (from 0.2%) on its way to a final much higher numbers in a couple of years, as discussed by Ben Broadbent and Kevin Daly in recent months.
- The recovery is far from limited to the Euro-zone. In Switzerland, most importantly, the May out-turn of the KOF Leading Indicator (EMEA-MAP Relevance Score: 5) will print on Friday. It is perhaps inevitable that the rapid acceleration in the KOF will begin to fade, but the fact that both the PMI and the KOF have shown such strong gains over a consistent period suggests that there is still room for further upside in this key indicator of Swiss economic activity. We are in-line with consensus, expecting modest gains from 1.99 to 2.03.
- In Sweden, Q1 GDP will be released on Friday. We are above-consensus, looking for +1.2%qoq (non-annualised) growth against the market’s expectation of +1.0%. However, in the context of the volatility observed in early GDP releases in Sweden, the difference between our forecast and that of consensus is small. Preliminary GDP releases have an EMEA-MAP Relevance Score of 4 (rather than the maximum 5) because of the considerable revisions that occur to early vintages of the official data.
- In Central Europe, the Polish MPC meets on Tuesday to consider its monetary policy stance (no change in interest rates), and on Friday-Saturday voters in the Czech Republic will choose a new Parliament. Opinion polls allow for a wide range of possible outcomes: up to seven parties may make it into the lower chamber. The centre-left Social Democrats will likely get most votes, but it is far from certain that they, together with a possible ally in the Communists, will be able to secure more than half the seats in the lower chamber (and as Anna Zadornova has observed, even if they were able to, President Klaus might work hard to prevent such an alliance from forming). A rightist coalition is also possible, but this would require cooperation from the centre-right ODS and several smaller parties, raising questions about its sustainability.
and that’s the way Europe looks on this beautiful morning in Chiswick. I hope that wherever you are its at least half as good as it is here.
Erik F. Nielsen
Chief European Economist
Goldman Sachs
- 11493 reads
- Printer-friendly version
- Send to friend
- advertisements -


Thanks Erik,
This is Marley writing from, as always, mother's backyard, since there's already 3 generations in the house, here in downtown Depression; the weather is impeccable and I couldn’t think of a place I’d rather be shove this shovel handle than right up your trickle down hole. But more on that later. A good cup of chicken broth certainly contributes to my well-being but not the chickens.
Lot's of love
+1 HAHAHAHAHAAAA!
From the article:
HAHAHAHAHAAAAAA!
This is shaping up to be a GREAT day!
Anyone have a link to the particular brand of "Nespresso" Erik is drinking ?
I want to share the warm fuzzy squidy feelings, and enjoy the birds chirping in the warm sunshiney halucinogenic glow Erik is experiencing.
Am I laughing or crying?
Brilliant.
Go find a real Scrooge to haunt.
btw- is Depression to the south of Oregon?
"...and in the eyes of the hungry there is a growing wrath. In the souls of the people the grapes of wrath are filling and growing heavy, growing heavy for the vintage."
Don't the ECB's heroic "liquidity-providing" efforts count as an intervention in the bond markets?
These guys just don't get it. More and more debt producing incrementally less growth and confidence. Its not a liquidity problem its all about insolvency.
Life is always good as a young squidster. The weather is always fine. Things are probably proceeding smmothly to enable thr SEC to save face on their Huge Error in going after the squid. Hope the SEC doe'nt get tpoo harsh a punishment.
But young squidster can watch it all in amusement - life is good and nothing but blue skies and another king sized bonus in a few months. Feelin good- tingly all over.
You must view this article from his prospective - from the prospective of GS the machine is still working like a new BMW. The so-called crackdown against GS and supporting legal cases seem to be dissipating. The system has held for the moment. Nothing to come between them and billions of profits each and every month and another round of mega-bonuses coming their way. I imagine people at GS view everyone else like casino operators view their customers - if they are too stupid to keep giving the house (GS) their money, why should the casinos not keep accepting it?
+1 ... Exactly.
They *must* be bullish, because people otherwise wouldn't send capital to "invest". If you say, "hunker down -- Auntie Em, looks like a storm's a brewin'!", then there's no money to be made skimming from the "investors".
Ah- a beautiful day with a cup of coffee and a dollop of hopium added for good measure.
Try a shot of reality with a dollop of debt.
+100 that, Mikla.
CNBS provides an endless parade of these fuckers, always saying "now's the time to buy".
Why? Well, if they told you to sell they'd have less assets from which to skim their 150 bps.
Fuckers. Its all a lie.
When did a $23.5 billion dollar bank become small? It seems like just yesterday that IndyMac (around $29 billion) was front page news in this country.
On Cajasur. I believe its the 4th largest regional bank in Andalucia. It certainly had alot of branches all along the Costa del Sol last time i was there in 2007.
In any case, i feel the big problem with Spain is that they are notoriously bad payers. I refused to do business in Spain without bank factoring because you will end up having to hire "cobradores" (collectors) to nag your business to business debtors just to get paid on invoices.
So while cajasur is just the first of the smaller cajas to go down the tubes, one has to understand that there are hundreds of these regional banks who have lent billions of euros to Spaniards, many unlikley or (unwilling) to pay back those debts.
Looks like that bailout money arrived just in time. Muchas Gracias :-)
Read: "Everything's great in the economy except the people with the money. And look for the announcement of the SPV for a nice 'bump' for the drug addled markets in dire need of a fix. For all my clients buy Nestle S.A; for all my friends sell Nestle S.A. since the first thing to go in a recession is instant espresso with over priced espresso machines and expensive contracts. Lastly, 'Bank Failure Friday' is now Caja Failure Viernes' until further notice. See you in The Hamptons."
Funnily enough I'm patiently waiting for the worst of this to hit the Spanish housing market. I love Spain, and will buy when the euro drops.
Before Erik Nielsen was an acknowledged economist and the Managing Director of Goldman Sachs with responsibility for the economic research teams of Europe, Russia, Middle East and Africa, he had a budding career in Hollywood. Unfortunately (on all levels), Mr. Nielsen had limited acting abilities and and for economic considerations he was forced to join Goldman Sachs in 1996 as a senior economist for Russia, and was transferred to London in 1997, in order to build up the economic research team for the new markets in the European time-zone. Since 2005 he has been in charge of Western Europe as well. Before joining Goldman Sachs, Erik worked in Washington DC for 10 years, first at the IMF's European Department and later for the World Bank as a senior economist.
However, thanks to advanced technology, Mr. Nielsen's brief acting career lives on today.
www.youtube.com/watch?v=zDAmPIq29ro
Great, he's doing commercial ads for Nestle these days.
lol
Is this fucking guy on heroin?????????????????
Ooooohhhhh, I'm puking and it feeelllsssss soooooo goooooddddd!
Heroin has really gotten a bad rep. It is less dangerous to your body than alcohol or tobacco. It is the lifestyle that knocks you down. Heroin, molecule for molecule, is better for you than most OTCs. The addiction thing can be problem.
Let's save this for posterity (i.e. to be entered into evidence at trial later).
Nielson says:
"Switzerland is far from the only European country with the luxury of an export basket with great pricing power."
He is talking about his coffee. A Nestle product. No doubt a big Goldie client who appreciates the boost. Mr. Nielson fails to mention that the Swiss government forks over CHF 3.1B to protect its farmers. That is more than 3Xs what the US pays on a population basis. The reason is the strong CHF. So what does the SNB do? It intervenes in the global currency markets to protect the farmers and outfits like Nestle. This is just another of those "kick the can down the road" responses. The Swiss buy time and hope that everything turns out just fine as Mr. Nielson predicts. But the intervention is not without cost. The loss in 1Q 2010 on the Swiss holdings of Euros was another 3B CHF. It is adding up fast.
It's not going to work Mr. Nielson. The Swiss aren't big enough to buy all the Eros no one wants.
Exactly right...a cigarette boat can't act as a lifeboat for the Titanic for long.
Kowalski's version of The Day the Economy Collapsed:
http://themeanoldinvestor.blogspot.com/2010/05/update-523-worst-case-scenario.html
frequently Erik makes some type of reference both to the weather conditions at his residence in West London, a sampling from recent weeks:
http://www.virtual-chiswick.ukonline.co.uk/
This guy is writing from cloud cuckoo land
Yeah, but can he tell us the color of the boat house are hereford?
"The Swiss National Bank has long intervened to prevent unacceptable appreciation of the CHF. This past week they released their balance sheet for April, showing a stunning 23% increase in the line-item quantifying their foreign currency investments; that’s an indication of some CHF29bn in interventions in April to stem the fx appreciation."
No, Erik, that was a drastic reaction to that specific day's Euro >> CHF deluge from Deutschland.
Save this for Erik and St. Peter, or better yet his Erik and the angry investors backroom scene.
ECB just made nearly $1T appear out of thin air. Not much risk from here.
Apparently, all you have to do is do a magic trick anytime everyone tries to call your bluff and the show goes on.
I am anxiously awaiting QEv2, Benny boy going to make the sky turn dark with the dollars he will be blowing into the wind. Watch out peso, we're gunning for you next. No one will get to be worth less than us.
Why do I get the feeling that all hell is about to break loose in Euroland?
http://finance.yahoo.com/news/EU-nations-back-tougher-apf-2374714142.htm...
Add in airline strikes, and volcanos, and it is getting ready to be all out war against each other. How dare those Germans tell us what we are going to do again? Am I right?
Goldman give numbers to gov to print, then they reprint the number themseleves and say "see how good the numbers are!!" What a load of W4 shiester
Now let's all sit in a circle and sing "kumbaya".
Or have a circle jerk like all of the central banks are doing by intervening in their own currency markets!
I guess I just take a different view on the situation than most here.
1) The Euro is still trading 40% above where it used to against the $USD.
2) I would hope the ECB is creating more money "out of thin air", since the collapse in velocity and M3 means someone better do it.
3) They used to say don't fight the Fed but everyone seems to think you can fight the ECB.
4) The European moment we've just had is no different than the March 09 collapse in stocks when it appeared the US Treasury et. al. was clueless and mark to market was destroying balance sheets.
5) Ever heard of sell in May and go away?
You cannot possibly blame the destruction of balance sheets on the mark to market rule, which only made visible the damage. It was fundamental BANKRUPTCY that destroyed those balance sheets! Hiding one's head under the covers will not make the monster of insolvency go away, much as you might wish it to.
Latest news from Greece: Socialist media anounce that in July Greece is going to ******* (yes, the d word)
Geez, Harry Wanger lives. What a blow-smoke-up-the-ass jackass this guy is.
Cannot resist. Funny and accurate:
http://www.youtube.com/watch?v=K-Xvy1r4Pm8&feature=related
This guy's attitude is a reflection of HIS situation and financial condition. He is making a huge income and so all is well. Hard to believe.
When i managed a fund during the 90's, i lived in Chiswick overlooking the Thames, so can relate to the occasional sunny day elevating one's mood above reality.
"For the first time this year I am writing to you from my backyard here in Chiswick; the weather is impeccable and I couldn’t think of a place I’d rather be right now. A good cup of Nespresso certainly contributes to my well-being this morning, but more on that later."
If I were a client, receiving that pearl of eloquence, and having to PAY for that crap....I would not be screaming bloody murder..I will just be cold bloodily be commiting one..HIS murder...and trying not to kill him that fast...maybe forcing him to sequentially gurgle down liters of his fekkin nespresso till the amount of caffeine doesn't start a cardiac arrest.....
Damn fekkin idiot makes a ton of money ....is a social injustice that cannot be perpetuated anymore...
MP
Why is this asshole's post even on here? Is Tyler Durden doing this to flush out all the idiots. This is a test, it must be a test! If I agree with this than Tyler will know I'm an idiot.
I think this post is garbage and I'm glad I just skimmed it.
The March 2009 lows won't hold.
Updated DOW daily and weekly charts:
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1