"While I think this policy is fundamentally right, I think [austerity] has reached its limits," was EU President Barroso's firestarter comment yesterday. As the WSJ reports [15], the IMF also said last week that the bloc should ease back on austerity, while a number of governments outside the EU have made the same call, arguing that its belt-tightening is holding back the global economic recovery and could end up being self-defeating. Of course, the beggars are once again trying to be choosers as Spain's de Guindos pushes his agenda along this 'growth vs austerity' path, "What we are going to do now is strike a better balance between deficit reduction and economic growth," but it is the bagholders (or money-men) of Europe that has the last word. As we noted yesterday [16], Merkel's expectations are no more money without ceding sovereignty, this morning it is German MPs who are up in arms as Nobert Barthle condemns Barroso's statements on austerity and Hans Michelbach flatly rejects this path of no resistance as it "undermines fiscal consolidation efforts." Perhaps the most clear message was from Volker Wissing who added, "demanding more money or time would send a 'fatal' signal to financial markets on reforms." With German PMIs so bad this morning, we are reminded of Bill Blain's comment, that ultimately growth is about confidence - and right now, Europe is a very unhappy place.
Via Bill Blain of Mint Partners,
...German PMIs were shockingly bad – manufacturing down to 47.9 vs 49.0 expected! ...So, as the German PMIs highlight, what's the theme this morning? Growth versus austerity.
Great stuff from Bill Gross. Smart enough to know when to switch; the man who predicted a Treasury rout last year has acknowledged fault, and is now a Treasury bull on the basis the global economy remains fractured, stuck in low growth, and the talk of the great rotation from bonds to stocks has been massively over-played. (I still say buy Japan!) US bonds are the "cleanest dirty shirt" and will remain so until we see growth and "genuine" economic recovery. In a world of policy inflated bubbles, Treasuries are the "most stable of all the over-valued assets". New Normal economy indeed.
He attacked the Eurozone and UK over austerity. "You've got to spend money," was his comment. Despite all the QE attempts to stimulate economies via inflation creating attempts, (the slide in gold prices is because deflation means gold loses its inflation hedge status), austerity has essentially achieved nothing.
There is a global agenda developing against austerity. Last few sessions it’s been the public defenestration of Reinhart & Rogoff for getting it wrong about the evils of Govt Spending vs Growth. The IMF has been trying to cover its bureaucratic posterior with an about face on austerity. And last week it was the complicit G20 nod to Japan to devalue the Yen to kick start its export driven economy.
Europe is at the very centre of the great austerity experiment. But as France and Spain spectacularly fail the Eurozone's 3% debt/GDP ratio - NSS - I somehow doubt there will be much in the way of punishment. This morning we've got the European Commission's President Barroso telling us austerity is “fundamentally right”, but we may have hit austerity limits.
Where is a poor politician to turn? Last week he was beaten for not being austere enough. Barroso was the carrot - the stick is Angela now telling Europe there will have to be greater surrender of national sovereignty and closer Fiskal Union before Europe gets more German dosh. Er.. is that really on the agenda?
As this week's PMIs and GDP numbers will show - growth across Europe is pants. What creates growth? Forgive me a moment as we go back to Economics 101. Is it governments "spending" billions through QE, or really spending billions on regional policy, infrastructure or benefits? Nope.
Ultimately growth is about confidence. If consumers are happy and confident they spend money thus boosting the demand for goods and services. Business owners reflect confidence. Banks are confident to lend them money to expand. The business cycle edges upwards and all the issues like higher inflation, bond negative higher rates and stock positive higher profits come into play.
Unfortunately that cycle in Europe is well and truly broken. It’s a very unhappy place. The lack of confidence at the base of the pyramid is obvious: jobs, over-indebtedness, and the only thing folk can express a view on is political dissatisfaction. The lack of confidence at the base is magnified by austerity - so diminishes growth and fuels the flames of dissatisfaction.
Austerity policies lack prescription. The aim of European austerity is to force countries to restructure and reform: encouraging business growth by removing barriers, restructuring economies from public/private mix to removing red-tape, and ensuring the banks are able to lend. These things are taken as objectives but little is being done to ensure they happen in the face of burgeoning European legislation. All a bit of a contradictory mess.
But despite all the noise, it’s no surprise European bonds continue to outperform. Low growth and austerity mean low rates.. forget the Euro tail-risk or sovereign default.. So Spain failing the debt/GDP test by 10%... nary a problem. That Italy's political crisis is only just beginning (yesterday was utter farce - ensuring gridlock and Berlusconi not going to jail), is but momentary concern. So what if Portugal's debt load is now higher than Italy's? France failing the debt test highlights how the story has moved on from the days of Merkozy to France as just another struggling European mezzanine economy. Doesn’t matter. The ECB will know what to do in a crisis…. (Well, that’s the markets’ bet!).