Notes From Underground: Touring Europe With Rose Colored Glasses

The Bank of Canada left interest rates unchanged and even maintained its “tightening bias” in the announced released this morning. It cited strengthening in the U.S. economy and the Japanese stimulus as positive global signs but noted that, “Europe, in contrast, remains in recession.” It is amazing that every central bank notes the weakness in Europe as a drag on global growth, but investors maintain a positive outlook on the European investment picture.” My glasses do not have a rose-colored tint and therefore I remain very skeptical about the ability of Europe to achieve any economic growth.


The case in point was a short Financial Times article today about the dismal state of SPANISH AUTO SALES. It notes that while Spanish auto exports are holding, domestic  market is “in free fall.” The first quarter results saw sales, year on year dropped 11.5%. Last year total auto sales fell to 700,000 units, the lowest since 1989. Yes, exports are holding because labor unions are accepting wage freezes and thus aiding the competitiveness of Spain’s auto producers. The downside of a wage freeze is that it creates an ADVERSE FEEDBACK LOOP for the domestic economy. If wages are not increasing the ability of workers to buy more will continue to drag on other sectors of the economy.

More importantly, with wages constrained and unemployment very high, debtors are finding it difficult to meet interest and principal payments on loans. The result is that Spanish banks curtail lending in response to the increase in NON-PERFORMING LOANS. The auto sector is a reflection of the dire straits of the Spanish economy. Beware of those analysts who maintain that the improvement in the Spanish current account deficit is a positive sign. It is not because of an improvement in competitiveness but a massive fall in imports. It is not hard to slow imports in an economy saddled with 27% unemployment.

***An issue I blogged about last week came to fruition today. In an FT article by Joshua Chaffin, “De Gucht Shaken By Political Realities,” the European trade commissioner felt the power of the German export machine. It was a German company that filed a complaint against the Chinese solar industry for dumping products in Europe at under production costs. A guilty verdict by the EU Trade Commission would result in the imposition of DUTIES on Chinese solar manufacturing. Unfortunately, for De Gucht the Chinese lobbied Chancellor Merkel and the Brussels bureaucrats were prevented from imposing duties. The Germans are Europe’s largest exporter to China and did not want German products hit with reciprocal tariffs in a tit-for-tat battle.

As one European commissioner noted: “China is a country that knows extremely well how to play the divide and rule game using carrots and sticks.” German exporters prevailed and showed the rest of Europe that German exports will be dictated by Berlin, not Brussels. As one European said many years ago: Laws for our friends we interpret, for our enemies we enforce it. ROSE COLORED GLASSES INDEED!

***In a DER SPIEGEL piece by Anne Seith (hat tip JB), “Draghi vs.Germany: ECB President Surrounded by Critics.” This news story brings forth the battle that will take place June 11 and 12 in the German Federal Constitutional Court in Karlsruhe, Germany. Bundesbank President Jens Weidmann has been a sharp critic of President Draghi and the ECB program to buy government bonds, claiming it would “jeopardize the ECB’s independence.” Draghi calls Weidmann’s views “Nein Zu Allem”–no to everything. The ECB is worried that if the German High Court “declares the bond program to be unlawful, the relative calm in the financial markets could end very quickly.”

President Weidmann is also opposed at Mario Draghi’s attempt to turn the ECB into a “bad bank” by pushing for the creation of a massive buying of small- and medium-sized loans by packaging them as asset-backed securities (ABS). The Bundesbank does not have the “stomach” for a EU-wide ABS program. The markets have wanted to believe that all is well in the European Union–ROSE COLORED GLASSES FOR ALL WHO ENTER THE SOVEREIGN DEBT MARKETS.


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One Response to “Notes From Underground: Touring Europe With Rose Colored Glasses”

  1. danderose Says:

    Yra, Great piece, as always! These europhiles certainly have themselves in quite a pickle! I can’t help but think they see the ‘improving’ trade balance in Spain as a feature of current policy and decreased domestic activity as just a temporary symptom. If they require the euro standard (read: gold standard) they have to play by the rules of the game. Keynes did a nice job drawing those out in the Economic Consequences of Mr. Churchill by discussing “credit restriction.” This appears to be a natural process except that Draghi and co find it unacceptable (to no avail for SME, only for sovereigns). Schauble and co better find some real economic solutions or the last 10 months bought and paid for with lip service will expire. Hopefully not before German elections. Tick… tock…

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