European Double Dip Begins, As Continent Finds Its Monetary Policy At Mercy Of New York Fed

Tyler Durden's picture

With everyone's attention focused squarely on Ireland and whether or not the country would be finally put out of its misery, one thing that most missed is that after today's release of subpar economic data, Europe has now entered a double dip. While this is not news to Zero Hedge readers, as we were confident this would happen when the EURUSD passed 1.30 for the first time several months ago, it may take others by surprise. Unfortunately Europe's troubles are only going to get worse. The only way to stimulate organic growth now, read create another export-led bounce, requires the devaluation of the euro. However, that would mean that the ECB would have to not only launch a comparable program to QE, which would paradoxically anger an inflation-weary Germany (whose economy would benefit the most from an export boom) but far more importantly, anger the New York Fed. And this Europe can not afford - keep in mind that in Europe's rickety financial structure in which a whole lot of countries are kept on life support, the ECB is only the second to last (and far less reliable) provider of resuscitation services. The last one is the New York Fed, which courtesy of its FX swap lines, now has infinite leverage over what happens in Europe. Should there be another crisis, and there will be, the Fed's generosity will be tested again. As will the IMF... to whose various credit lines America just happens to be the biggest sole contributor. There is a word for this type of arrangement: total leverage.

In exchange for all these assorted mechanisms that allow Europe to continue its failed EUR experiment, the Fed now is the ultimate dictator of European monetary policy. Therefore in the global race to the bottom, Europe is now guaranteed not to finish first as the Fed's tentacles have made sure that the quid pro quo arrangement is all too clear. Which simply means that the material drop in GDP will accelerate, as Europe finds itself with its monetary options cut off, even as America reaps the benefits of a weak dollar (if not vis-a-vis China, then certainly with regard to Europe).

Markit Economic Research summarizes today's barrage of very unpleasant European data best:

The Eurozone economic recovery lost momentum in Q3, as expected and in line with the earlier message from the PMI surveys. Gross domestic product rose 0.4% in the three months to September compared with a 1.0% rise in Q2. Further weakness looks likely in coming months, especially as domestic demand looks set to remain lacklustre in the face of financial market, international trade and political tensions.

Not just a payback from Q2 rebound

The 1.0% surging growth pace seen in the second quarter was clearly unsustainable for long, and was attributable to special factors, such as a rebound from bad-weather related disruption in Q1. However, it would be unwise to dismiss the Q3 slowdown as merely a normalisation or payback from the growth spurt earlier in the year. PMI data suggest that growth momentum continued to be lost at the start of the fourth quarter, taking the GDP quarterly growth rate down to 0.3%. (The Composite Output PMI covering manufacturing and services averaged 55.7 in Q3 but slipped to an eight-month low of 53.8 in October). With media headlines highlighting growing trade tensions, and the euro area's periphery back in crisis mode, the chances of growth slipping further in coming months are very high.

Uneven recovery

The region's recovery is also looking increasingly uneven. Back-slapping in Germany as GDP growth came in at an impressive 0.7% is going to sit very uncomfortably with the unexpected weakness seen in other countries, especially the contraction seen in the Netherlands and stagnation in Spain. With ECB rhetoric focusing on the removal of ultra loose policy at a time when peripheral economies are stalling or contracting, policy tensions are likely to add to the uncertainty and unrest in the region and darken the outlook.

Surprise fall in industry

While GDP growth was in line with expectations, euro area industrial production disappointed by a wide margin. Production fell 0.9% in September against expectations of a 0.3% rise.

The monthly data tend to be volatile, and the decline most likely overstates the extent to which the industrial sector weakened at the end of the third quarter. These data nonetheless add to the growing body of evidence which suggests that the industrial sector is expanding at a much weaker pace than earlier in the year. Looking at growth over the most recent three months, the rate of expansion has slowed to just 0.8%, down from a peak of 2.9% in the three months to May.

This is a major disappointment given that industry has been a key driver of growth earlier this year and raises questions about the resilience of the recovery. The fact that durable consumer goods showed the greatest decline (a 3% fall during the month) highlights the persistent weakness of domestic demand in the region as a whole, as households worry about austerity measures, job security and the growing financial crisis, which is going to remain an important drag on economic growth going forward.

So let's summarize this week's developments: China is overheating and will hike rates soon in an attempt to neutralize the madman's liquidity tsunami, Europe's sovereign crisis will soon take its next two casualties even as the continent no longer can rely on even pipe dreams of EURUSD parity, and most importantly, the self-fulfilling prophecy of POMO updays is now over....

One wonders what the InTrade odds of the GM IPO being pulled at this point are.

Full Markit Report link

h/t Frode Haukenes

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SheepDog-One's picture

All this is what a Princeton economic masters degree gets you? I'll pass, just go to welding school or somethin'.

the not so mighty maximiza's picture

Its going to get interesting now, the PHd's are really going to try harder to proove they know what they are doing.  

Problem Is's picture

Unemployment will not turn around...

Until all Fed PhD economists are unemployed...

LowProfile's picture

The last one is the New York Fed, which courtesy of its FX swap lines, now has infinite leverage over what happens in Europe.


Did I just miss something, or is this an open invitation for the EU to dump all it's financial garbage on the US?!


Bonesetter Brown's picture

There is nothing new to these FX lines.  They were used heavily in late 08 as part of the pre-official QE swelling of the Fed's balance sheet.  Then they were repaid (Fed probably made a nice return on that transaction).

The swap lines were re-opened this past May, but there has been conspicuously low (if any) draw on these lines.

Merkel took all of Europe down the austerity path and that saved/rallied the Euro temporarily without the use of the FX line.  Now that austerity is playing out Irving Fisher style, real debt burdens for the periphery Euro nations increase, and their sovereign debt has fallen outside the safety zone of the better credits (gold, USTs, bunds, etc) creating blowouts in spreads.  PIGS default is a certainty; always was.

So far it looks like Bernanke's QE is preferable to Trichet/Merkel/Weber austerity cum debt serfdom.  But boy, there has got to be a better option still.

I strongly suspect TPTB in Europe want to avoid drawing on the FX lines at all costs, but will need to lean heavily on the swaps in the end.  Or maybe the ECB is being set-up as the ultimate "bad bank"?  Who knows?  The French and German banks have already effectively offloaded a significant amount of PIGS sovereign debt on the ECB. Maybe they could start swapping more PIGS debt for USD at the ECB.  The swap line could be a "don't throw me into that briar patch" sorta thing.

No doubt extreme pressure/leverage is being applied by multiple parties, and everyone is jockeying, positioning, negotiating the quid pro quo, etc.

ATG's picture

China and Germany just told Bernanke, Geithner and Obama at G20 in Seoul to go suck a lemon

QEII is kaput

Bonesetter Brown's picture

Of course they did.

"QEII is kaput" -- nice choice of words.

Did the Chinese and Germany say what they might do in response?  Honestly, I've missed the coverage.

dnarby's picture

Personally I think they are planning to sacrifice stocks at the bond altar.

trav7777's picture

QE is preferable to austerity.  The banks don't deserve interest on the money supply.

Notice the article and all like it, tho...always the talk of growth growth growth, what can we do to get growth back.

Until we abandon this talk of growing forever and ever and ever, we're not going to come up with any real solutions.

The debts CANNOT be paid; we are in a contractionary climate.  Principal at this point is dicey, forget interest.

There ARE NO OPTIONS in which NOBODY has to take a haircut.  The battle is between the oligarchy who have all the bond claim tickets and want austerity or in the absence, will continue to borrow to stockpile liquidation claim tickets, and the rest of us, who need jubilee and to be relieved from this parasitic banking system.

Problem Is's picture

Welders clearly understand micro theory as they do well both cyclically and counter cyclically...

Bennie... not so much...

His Dudeness's picture

Double dip choices...


Caramel sauce

Hot Fudge

Chocolate syrup


Fruit topping

French Fries


tmosley's picture

I'll take Turd and nuts.  Despite the bad taste, they tend to be right a lot more often than not, and certainly much more than the Ph.ucking D.ouchebags in charge.

plocequ1's picture

My sarcasm mode has ended. Im seriously concerned.

LowProfile's picture

That certainly took you long enough.

My advice?  Get gold, food, guns, gas, and plenty of popcorn.

Even if you don't actually need the first four, you'll sleep better...  But for sure you're going to want plenty of popcorn to enjoy the show with.

malusDiaz's picture

May I suggest Coconut Oil?  5 Gal is cheep!


+50 pound back of Popcorn... I can make more popcorn then my HOUSE!!!!!



scratch_and_sniff's picture

I want trading reopened right now. Get those brokers back in here! Buy 'em!! Wilson, where are you going? You idiot. Get back in there at once and sell, sell, sell !!

Agent P's picture

Ralph Bellamy falls to the floor clutching his chest

"Mortimer, your brother's not well, we'd better call an ambulance."

"Fuck him!"


God I love that movie!!!

Spalding_Smailes's picture

EU : Ben we need some more benny bux.

BEN : OK, we are going to need 10% back in gold

EU : Welllll ummmmmm we need the bux so o.k.

BEN : Nice doing business, thanks.

BEN : Next ....

Mitchman's picture

Hope Merkel is getting some sleep on the plane on her way back to Germany 'cause her phone is going to be ringing hard the moment she gets off.

max2205's picture

Europe can now join the dollar union.  I'll be paying for my brat in dollars bitchaaaaaaaaaaas!!

Last kick of the can at the end of a dead end road.

Big Corked Boots's picture

What would happen if the Single World Currency turns out to be the US Dollar?

Scary shit, that thought is.

Bonesetter Brown's picture

Kinda funny, kinda sad.  Just not ha-ha funny.

ATG's picture

What would happen if the Single World Currency turns out to be the US Dollar?

Well, the US allegedly has more gold reserves than any other country

Bonesetter Brown's picture

Indeed it has.  And pretty good on-shore and off-shore energy reserves as well.

Danielvr's picture

Or take oil off the dollar.. I don't think the Arabs would mind.

Ripped Chunk's picture

Merry Christmas!!!!!

Loco Vida's picture

Keep printing Bennie...........we made ya europe/asia/south america and we going to break ya......going to level the playing field or we all go to hell

Go Benny Go Timmy...........its your birthday



bob_dabolina's picture

The future is unusually uncertain.

dumb shit.


Miles Kendig's picture

What kills me is this action, in broad strokes is just too predictable.  I wonder what the IMF's swap line at the fed is?  Regardless, this game is all too familiar to us folks who survive here off South Main Street

Assetman's picture

So to summarize...

The Fed initated Euro strength vs. the USD by unabashedly printing money into the next QE wormhole.... you know, as a way to save it's own domestic economy (we are led to believe).

At the same time, the EU is reluctant to counter with a similar QE policy due to their own dependence of the Fed's swap lines.

So... the conclusion is... the EU is going to have to "eat it" and take the double dip full force, while the U.S. continues to flood the world with doelarrs?

I would think there would be rioting in the Euro streets.

It's of little wonder the world is more than a little ticked off with U.S. policy. 

Miles Kendig's picture

And helps provide further clarity as to why we still have so many uniformed service members in Europe.  While Europe has grown reliant upon US largess to save them the hassle of footing the bill for their own defense (what looked like uneven burden sharing in Afghanistan gains in clarity).  Now Europe's military and para-military (police and others) forces are woefully unprepared without our assistance.  I wonder what the reaction on the streets of Europe would be if their governments felt compelled to call on the US to provide forces to help maintain order?

scratch_and_sniff's picture

Europe is in Afghanistan as a gesture of solidarity, US gov knows they could fight that pathetic and pointless war on their own, the whole thing is a very bad and tasteless joke. As for US forces maintaining order in Europe, that’s very funny indeed.

Miles Kendig's picture

Indeed it is.  Hopefully my humor will improve as the evening progresses.  And that whole A episode is beyond tragic.

TBT or not TBT's picture

Let's twist the knife more shall we?   Europeans are in Afghanistan to maintain the facade that NATO isn't ridiculous, but the whole affair stands now as a proof that NATO is ridiculous.

szjon's picture

Like when we needed your help in 1939 and you sat back and sold us overpriced weapons?  Or are you one of those for whom the war started in 1941?


Oh, please show me one example of US troops providing 'order' on their ventures overseas. Exporting chaos more like!

robobbob's picture

if you thought our prices were high in 39, just wait till the 201X catalogue comes out.

we gotta lot of overhead to cover this time around

Yikes's picture

I can understand the need for swap lines back in 2008.  As I understand it, Europe was looking for the relative safety of the USD.  But now?  With QE2. 

Is Tyler suggesting that all the whining from Europe is just that, whining, and that even with QE2 and QE3 coming, that the death of the dollar is greatly exaggerated and that it is still king?

Bonesetter Brown's picture

Don't rule it out.

If you can figure out a way to destroy all the other reserve currencies, or pseudo reserve currencies, or wanna-be reserve currencies, then the relative reservy-ness of your currency can increase greatly.  And what is the big worry about a large increase in money supply if global trade and forex reserves must rely all the more on your currency?

Of course, there is that pesky problem with gold.  What to do about gold...

Might be a good idea to use your military to firmly control a good chunk of the world's energy supplies as a hedge.

Orly's picture

Europe at that time was selling everything they had priced in USD so that they could buy Treasuries.  The 4X swap as designed to stop the overwhelmong selling of US equities and to stabilise the GBP (which was ruined...).

Now, the opposite is true.  Now, it is designed to get people out of equities and into US bonds.  Demand will be much stronger than you think.  That move helps the Euro and the AUD come to a softer landing vis-a-vis the USD.

It's just the other side of the see-saw.

scratch_and_sniff's picture

"I would think there would be rioting in the Euro streets."


Give it time, the pain is nowhere near sinking in yet because it hasn’t really started. 99% of people are still in la la land, and a vast majority have never known austerity. UK gov just released details of benefit cuts for the poorest claimants(including the disabled), and there has been a huge media drive to turn the rest of the nation against the "work-shy",(everyone seems to have forgiven the bankers for the moment) and the rest of the nation is buying it. The only thing is, when the rest of the nation realise that they too will soon be needing these benefits when the public sector cuts kick in, things will get ugly. They want people with no job to work for £1 an hour...when you start demanding that accountants, nurses, electricians etc work for £1 an hour(sweeping streets and cleaning etc), then you will see fireworks, IMO. And rightly so!

trav7777's picture

UK is an interesting study to watch...that is the oldest and firmest-entrenched oligarchy and banking clan.  The message is GET BACK ON YOUR WHEELS, HAMSTERS from them.  And the average Brit is so goddamned mindfucked and so prideless and cowardly now that they are just going to soldier on and take it.

Orly's picture

Unfortunately, Oscar, you're absolutely correct.

Dismal Scientist's picture

As opposed to the average American ? Now thats funny.

EvlTheCat's picture

"I would think there would be rioting in the Euro streets."

One would think there would be rioting in the U.S. streets too.  ***Please, add quarter to continue!!*** 

Die Weiße Rose's picture

"The New York Fed, which courtesy of its FX swap lines, now has infinite leverage over what happens in Europe."

I knew it - Napoleon Bernanke is leveraging his way into Europe again !

sabra1's picture

don't the chinese trade heavily with europe? wouldn't this really piss them off, like, totally?

EvlTheCat's picture

They do now since their exports to the U.S. have flat lined.  In my opinion the Chinese government is getting what it deserves trying to keep up with the Fed's poor money laundering skills. It should be no "surprise" that industry dropped off since Europe's net imports from China are on the rise.