If only the Euro area could replace Barosso and Van Rompuy with Olazabal

Last night gave us an example of European integration actually working for a change! Whilst Presidents Barosso and Van Rompuy struggle mostly ineffectually at great expense to achieve this they were given a lesson how to do it  in the sporting arena. A Spaniard invoking the memory of another famous Spaniard led 4 Englishmen, 2  Northern Irishmen, 1 Belgian, 1 Dane, 1 German, 1 Italian, 1 Spaniard, and  1 Scot to victory in the Ryder Cup. Furthermore they did see from a very unfavourable position. Indeed there was  also a spirit of unity and teamwork displayed between Northern and Southern Europeans that must have had Barosso and Van Rompuy grinding their teeth in frustration at thier failure to achieve anything similar. Mind you the leader Jose Maria Olazabal led from a position of achievement,success popularity and respect which is long since impossible for the aforementioned duo to copy.

The European Economy

As we open the month we get the latest updates on the main economies in the Euro area and let us see if Spain can lead us too in this regard.


Unfortunately there is little sign of the ambition and drive of Seve Ballesteros to be found in her manufacturing sector. From this morning’s Markit Purchasing Managers Report.

The Spanish manufacturing sector remained in contraction in September as output and new orders continued to fall sharply……..The seventeenth successive monthly fall was substantial, and broadly in line with that seen in August.

Whilst the reading did improve from August’s  44 to 44.5 there were a couple of grim reminders of the depth of Spain’s economic crisis.

Employment also continued to decrease, and at a sharp pace. Moreover, the rate of job shedding quickened to the fastest in 33 months.

When your undemployment rate if already 25% you do not want to see signals like that and even worse inflationary pressures are around too.

September data pointed to a sharp acceleration in the rate of input cost inflation, which hit a 16-month high. Respondents noted higher raw material costs, with rising food prices often mentioned.

So much for unemployment and inflation being a trade-off. But of course many official measures exclude food prices as apparently eating is not a priority or maybe paying for food is not such a priority for them.


Here we saw a similar picture of a relative improvement but not one strong enough to stop the decline of Italy’s manufacturing sector.

The seasonally adjusted Markit/ADACI Purchasing Managers’ Index manufacturing performance – climbed to a six month high of 45.7 in September, from August’s mark of 43.6. That signalled a further (albeit slower) deterioration in the performance of Italy’s manufacturing sector.

And here too the employment situation continues to look weak.

Employment fell for the fifteenth time in the past 16 months in September


After her two southern neighbour’s report one may be expecting an improvement too from France but we do not get it.

The headline Purchasing Managers’ Index recorded 42.7, down from 46.0 in August. That was the lowest reading since April 2009 and indicative of a substantial deterioration in operating conditions.

As you can see France has bucked the trend and recorded a number which reminds us of the initial contraction as the credit crunch first hit. Regular readers may recall that I felt earlier in the year that we should wait for numbers after her election period to see if the slow down hitting her was confirmed and it now appears that it has been. Indeed there are signs of building problems in La Republique as last week’s number (47.9) showed that her retail sector continues to contract too.

We seem likely to return to the debate before long whether France should be treated as a Northern European country or a Southern European one.


Even in Germany’s manufacturing sector there has been a slow down in recent months but it reduced in scale this month.

At 47.4, up from 44.7 in August, the final seasonally adjusted Markit/BME Germany Purchasing Managers’ Index pointed to the least marked deterioration in overall operating conditions since March.

So there is some relief as Germany definitely represents the core nations of the Euro and she is recovering a little.


We now come to what  has been for quite a while the equivalent of an economic video nasty and it is my sad duty to report that this continues to be the case.

At 42.2, virtually unchanged from August’s mark of 42.1, the Purchasing Managers’ Index pointed to a further marked deterioration in the health of Greece’s manufacturing sector in September. The headline index has now posted below neutrality continuously for over three years.

It has indeed been three grim years for Greece and even the one part of her economy which had looked optimistic has now turned south too.

a sharp and accelerated fall in new export orders the most pronounced since the depths of the global financial crisis in early 2009.

Greek manufacturers have found themselves trying to reduce prices to combat what feels like ever falling demand and like many others are now finding that input cost pressures are restricting their ability to do this.

This is of course a long way from the original troika report which forecast economic growth of 1.1% for Greece in 2012 and an unemployment rate of 15.2% compared to a reality of circa -6% and 24.4%.

Putting it all together for the Euro

The situation is summed up well here.

At 46.1 in September, the headline seasonally adjusted Markit Final Eurozone Manufacturing PMI posted below the neutral 50.0 mark for the fourteenth successive month.

So we are in the midst of a sustained slowdown which has even affected the economic locomotive which is Germany’s maufacturing sector. The breakdown is uneven and Ireland and the Netherlands have managed minor expansions this month, but more the counterbalancing this has been sharp falls in Spain,Italy and Greece which now seem to be accompanied by France in their manufacturing misery. If we look for context and ask what this means then take  a look below.

The survey is consistent with manufacturing output falling at a quarterly rate of perhaps as much as 1.0%, which means the sector will act as a severe drag on economic growth.

So if this is any guide the Euro area will show a contraction in the third quarter of 2012 and it may be a substantial one. Either way it will be in recession as a whole.

Euro area unemployment

One grim reminder of a consequence of this slow down has also come today.

Compared with July 2012, the number of persons unemployed increased by 34,000 in the Euro area……Compared with August 2011 unemployment rose by 2.144 million in the Euro area.

Back in the heady days of late 2007 it looked as though Euro area unemployment was heading for 7% whereas we now see it at 11.4%. As a percentage it has remained stable for three months but I worry that it will move higher again now that the summer holiday season has ended.

Looking back over the figures for the last year reminds me that not only is the overall unemployment rate lower in the whole European Union than in the Euro area but that the gap has widened over the past year.

So we see that the Euro area remains in an economic slowdown and I am reminded of the promises made by its leaders in early summer. Presidents Barosso and Van Rompuy promised us on May 23rd that their priority going forwards would be economic growth which tells us that they are a long way short of the standards set by Senor Olazabal.

Spanish bank stress tests

These came in coveniently just below the leaked 60 billion Euros. How nice. For some perspective we can also look back to May. You see on May 25th I reported that I did not believe the official Spanish estimate that Bankia would require some 7 to 10 billion Euros of extra capital. The bank stress tests only four months later tell us that it will now need 24.7 billion Euros. That development is more eloquent as to what is likely to happen next than any breakdown of the many flaws in these stress tests.

Somebody is as bad at forcasting the future as Euro leaders

With apologies to American readers this was issued by ESPN on Saturday night.

For those who think this Ryder Cup is finished, think again. Team Europe can still win if the following five things happen Sunday:
– Keegan Bradley is abducted.
– Team USA captain Davis Love III inserts Cup spectators Michael Jordan, President George W. Bush, Amy Mickelson and the Rev. Jesse Jackson into the singles lineup.
– Lee Westwood: U.S. citizen.
– Marty McFly shows Team Europe captain Jose Maria Olazabal how to go back in time. Last Friday morning will do.
– Team Europe wins eight of the remaining 12 matches to retain the cup.

A job producing official economic forecasts awaits that man or woman. They have a choice between the troika and the Bank of England as future employers….

This entry was posted in Euro zone Crisis, GDP, General Economics, Greek Financial Crisis, Inflation, Recession. Bookmark the permalink.
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  • andy zarse

    As you said several times last week, Shaun, it’s all about fantasies. When I was a teenager I once wrote to Jim’ll Fix It to ask Jim whether he could fix it for me to flog Joan Bakewell around the BBC2 studios, but for some reason my letter was never acknowledged. Fantasy is an odd business, if only in the sense that it rarely gets fulfilled. When you put your numbers down on the Euromillions lottery ticket you are not playing silly ego-games with yourself. That McLaren F1 and a Porsche Turbo for the missus are what you might call potential realities. No, a real fantasy involves so much more than realisable things. It’s the twisted dreams that are really the straightest, but you can’t argue with Pirsig and his Zen and the Art of Motorcycle Maintenance when he says the big burst in modern mankinds’ bladder is that he can’t see much further than his own windscreen.

  • Robert

    Shaun hi
    One aspect that has recently reared its head and which i would have thought would have a very negative effect on the EZ in general, is the likely demand for Catalan independence. From family there, I understand that there is a very genuine majority support to demand independence.

    Leaving aside the rights and wrongs, surely the effect on the Spanish bond market will be huge, especially if there is a ‘formal’ demand of the central government.

    This will only deteriorate the economic situation in Spain as a whole, but the other issue, is that surely a divorce is financially impossible to achieve. Even if there was agreement between the Spanish Parliament and the catalan Governemt (which is most unlikely), it would surely take years to agree the split in the National debt etc etc. During this period, without the support of the ECB (and Germany), the bond market would be effectively closed. Therefore, any wish for independence is academic unless Mrs Merkel is prepared to underwrite the Spanish deficit whilst the process proceeds.

    I can see this will create a huge problem, and as the Economist commented this week, – to create a Constitutional crisis on top of a financial crisis, – is playing with fire. But this seems to be what is happening.

    Am i right???


  • Anonymous

    Hi Shaun,

    In regard to Spanish inflation excluding food costs – I can only suggest that the Spanish bureaucrats eat out on someone else’s tab so frequently that they don’t need to buy food ….

  • JW

    Hi Shaun
    Paults for PM?
    ‘Europe’ is great as a collection of individual nations pulling together, making the most of the strengths of each. Pretty dire as a homogeneous ‘grey’ lump of lowest common denominator.
    What a contrast between an unforgettable summer of sporting success and the ongoing economic malaise.

  • Jim M.

    Hi Shaun,

    Congrats are obviously in order for the Ryder Cup success, but it occurs to my non-economist’s mind that a similar performance for the European economy will involve the opposition suffering a similarly calamitous loss of performance as the US golfers.
    So that’s a hard landing for the US, catastrophic losses by the BRICs and the Swiss going commie overnight.
    Not very likely, really!

    My inner poker player is telling me the result was more a triumph of variance over expectation and the Yanks should be mortified at having thrown it away!

  • http://realpolecon.wordpress.com/2012/10/01/eurozone-crisis-live-troika-disputes-2bn-of-new-greek-cuts-package-business-guardian-co-uk/ Eurozone crisis live: Troika disputes €2bn of new Greek cuts package | Business | guardian.co.uk< « Real Political Economy

    [...] then analyses today’s economic data, concluding that Europe is stuck in a “sustained slowdown”, which could mean a sharp [...]

  • Shaun Richards

    Hi Andy

    It looks as though it may not entirely have been all bad to miss out on being on Jim’ll Fix It…

  • Shaun Richards

    Hi Robert

    I agree that the apparent rise of Catalan nationalism poses question after question. Let me offer some.

    1. The Euro is supposed to be heading towards federalisation and yet we are seeing more than one area possibly moving in the opposite direction (Catalonia,Scotland..)

    2. In economics/finance it is often assumed that default risk is low/zero for nations but not only do we have in quite a few cases real problems we have the issue of what happen if the nation that issued the debt breaks up?

    3. If the ECB backs Spain does that apply to Catalonia? Perhaps just as importantly to a (poorer) Spain without Catalonia?

    4. As you say there are plenty of areas which will be hard to split like defence.

    So if it happens it could easily tip over into a more violent sphere as clamping down is unlikely to work…

  • Shaun Richards

    Hi JW

    Well one thing that Ian Poulter has proved is that he can be an inspirational figure. I guess a dose of guts and will to win means that he is far too well qualified to be PM. After all he has done something which so few politicians have these days…

  • Shaun Richards

    Hi Jim

    I agree. One of the worst sporting situations is where a team you support take a lead and then assume that the game is over. Somehow the psychology is something that can very very rarely be put right again. I have been on the other side of it too as I still shudder at the thought of what was an England rugby team which went on to be world champions cruising to a 20 point lead against France with only a quarter of the game to go and then losing! For any AC Milan fan the champions league final where you led Liverpool 3-0 at half time and then lost must have the same effect…

    One of the lessons which I learnt from my time in the derivatives arena was that human beings have a dreadful basic measure of lower risks, we are unable to distinguish them from zero in the main.

    Actually a hardish landing for the US isnt that unlikely but Europe (including the UK) would not be winners on that day.