Britannia Radio

Step by step the crisis develops and widens gradually to embrace the
whole world. Some of the more optimistic crumbs thrown out in the
last few days are beginning to look decidely ill-founded.

The Euro as a single currency without overall political control seems
doomed. Euroscerptics may chuckle at the prospect but a collapse
will harm us all, for such a collapse will destroy decades of cross
border profitable trading.

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TELEGRAPH Business News 15.8.08
Spain in crisis as Europe crumbles (print edition)
ECB slammed as Europe crumbles (online edition)

By Ambrose Evans-Pritchard

The economies of Germany, France and Italy all contracted in the
first quarter and may now be in full recession, shattering
assumptions that Europe would prove able to shrug off the effects of
the credit crunch.

The picture is darkening so fast in Spain that Prime Minister Jose
Luis Zapatero cancelled holidays and called his cabinet back to
Madrid yesterday for the first emergency session of its kind since
the Franco dictatorship. The crisis meeting agreed to a €20bn (£16bn)
blitz on public works, tax cuts, and a mortgage rescue to halt the
downward spiral.

Growth has turned negative in Ireland, Denmark, Latvia, and Estonia,
while grinding to a halt in Sweden and The Netherlands. Iceland
contracted by a staggering 3.7pc. The grim data from Eurostat follows
a recession warning in Britain, and shock news that the Japanese
economy had shrunk 0.6pc in the second quarter.

Almost the entire bloc of rich Organisation for Economic Co-operation
and Development (OECD) countries - still two thirds of the world
economy - are now in the grip of a major downturn. The oil shock over
the early summer appears to have had a dramatic effect on the heavy
industries of Japan and Germany.

The eurozone as a whole shrank by 0.2pc, the first contraction since
the launch of the single currency a decade ago. Germany led the slide
with a fall of 0.5pc. France and Italy fell 0.3pc. The delayed
effects of the strong euro, tight credit, and slowing exports have
now kicked in with a vengeance.
"This is an alarm warning for the economy," said the Confederation of
German Industry (BDI).

The European Central Bank and its president Jean-Claude Trichet
appear to have misjudged the severity of the downturn, and may have
made a serious error by raising interest rates a quarter point to
4.25pc last month.

By then it was already clear that property markets were slumping
across much of the region. “What is shocking is the speed of the
collapse in Germany,” said Albert Edwards, global strategist at
Société Générale. “I think there has been a lot of hubris at the ECB.
They took a derisory attitude towards the US, saying the Federal
Reserve was too aggressive in cutting rates. Now they are reaping the
bitter reward of their policy,” he said.

The ultra-hawkish Bundesbank’s Axel Weber gave no hint yesterday that
the ECB is softening, suggesting that the bank sees a deliberate
crunch as the only means to pre-empt a 1970s-style wage-price spiral.
“The confidence expressed by some observers that weaker economic
growth will lead to a damping of inflation pressures is in my opinion
premature,” he said.

This is a highly controversial point. Although fuel and food prices
have pushed headline inflation to a post-EMU high of 4.1pc, core
inflation has fallen from 1.9pc to 1.8pc over the last year. Real
wages have suffered a brutal squeeze. Julian Callow, Europe economist
at Barclays Capital, said the ECB erred by pre-announcing a rate rise
in June.

“They boxed themselves in, and it became hard to retreat. It is clear
from the August Bulletin that they have now really woken up to the
downturn,” he said. “Recessions in Europe are very nasty events: they
tend to be a lot deeper and more protracted than in the US, which is
better able to cope with the ups and downs of the business cycle,” he
said.

Mr Callow said the EU’s budget deficit limit of 3pc of GDP makes it
impossible for many countries to cushion the hard-landing with a
spending boost. France and Italy are already near the ceiling.
Indeed, Italy is having to tighten policy into the downturn.

Bernard Connolly, global strategist at Banque AIG, said the eurozone
faces possible disintegration unless there is a fiscal bail-out from
Germany that matches – in sheer scale – Berlin’s Versailles
reparations payments after the First World War. “The bursting of the
EMU credit bubble seems imminent, and will reveal current account
imbalances among euro area countries as extremely dangerous. The
medium-term feasibility of the euro area in its current form must be
open to very considerable doubt,” he said.

Spain needs a devaluation of 30pc and Greece needs 40pc to restore
balance to their economies after suffering a major loss of unit
labour competitiveness. The current account deficit is 10pc of GDP in
Spain, and 14pc in Greece.

Mr Connolly said the combination of collapsing demand in southern
Europe and a slide in the external value of the euro now means that
the EMU bloc may now start to export the effects of its troubles to
the rest of the world, making it harder to bring the credit crisis to
an end.

Eurostat said Spain managed to eke out growth of 0.1pc in the second
quarter but this is a lagging indicator. The switch from boom to bust
is now turning violent. There are mounting fears that the country
could tip into a severe crisis over the next year.
“A momentous economic slowdown is now under way. We believe the
deterioration in Spain is just in the beginning stages,” said a
report by Morgan Stanley. It said there was a serious risk of a blow-
up comparable to the ERM crisis in the early 1990s. This time there
is no easy exit. Spain cannot devalue within EMU, or resort to
emergency monetary stimulus.

The Bank of Spain revealed yesterday that Spanish lenders have now
borrowed €49.4bn from the ECB, confirming reports that smaller banks
with heavy exposure to the property market are now relying on EU
taxpayer funding to survive. It is unclear whether long-term support
of this kind is strictly legal under EU rules.

Some banks appear to be issuing fresh bonds for the sole purpose of
obtaining money from the lending window in Frankfurt. Spain’s finance
minister Pedro Solbes says it was clearly “unsustainable” for the
country to build 800,000 homes last year in the final crescendo of
the boom, but said there was nothing the government could do to stop
it.

“The economic situation is worse than we all predicted. We thought it
would happen slowly but instead it has hit fast,” he said.

Construction reached 18pc of GDP in 2007, much of it funded from
foreign capital sources that have now dried up. The sector is in
freefall. Unemployment has jumped by 457,000 over the last year.
Industrial output plunged 9pc in June
===================
THE TIMES Business News 15.8.08
Will courage pay off for the United States?
David Wighton, Business Editor's commentary

Six months ago eurozone finance ministers were crowing about the
resilience of continental economies in the face of the credit crisis.
This was created by wicked Wall Street bankers and the impact would
be largely restricted to the US, they implied. The stern approach of
the European Central Bank towards mounting inflationary pressure was
applauded and contrasted with the panicky interest rate cuts of the
US Federal Reserve.

Six months on, the picture is a bit more complicated. The eurozone
economy shrank by 0.2 per cent in the second quarter, figures
yesterday showed. This may be what is needed to keep inflation in
check but it is now the ECB that could be accused of panic, after
raising rates to 4.25 per cent only a month ago.

Meanwhile, those reckless Americans enjoyed a 0.5 per cent expansion
in GDP over the same period, helped by the slashing of official
interest rates to 2 per cent.

Admittedly, yesterday's US inflation numbers, which saw consumer
prices up by 5.6 per cent in July, were hardly reassuring.

And the growth in the second quarter may merely reflect the impact of
the Bush Administration's tax rebates.

But there are very tentative signs that the slump in the US housing
market may be bottoming out. And Wall Street shrugged off the
inflation numbers yesterday as investors reasoned that the sharp fall
in the oil price - which was down again yesterday after a brief rally
on Wednesday - and other commodities would allow the Fed to keep
interest rates low.

Eurozone inflation is also worryingly high, though the July figure
was revised down yesterday to 4 per cent from an initial estimate of
4.1 per cent, which some economists said showed the slowdown was
having the desired effect.

The eurozone contraction in the second quarter was hardly unexpected
given the impact of high energy prices on consumer spending and a
slump in business confidence. Some of the fall also reflected an
exceptionally strong first quarter in Germany, where output shrank by
0.5 per cent in the three months to June. But there was also a nasty
0.3 per cent fall in France.

The apparent change in economic fortunes on either side of the
Atlantic has been reflected in a dramatic swing in currencies over
the past few weeks. The dollar has surged against the euro and
against the pound thanks to the increasingly gloomy outlook for the
UK economy.

It may be that the US economy will follow Europe into the trough once
the effects of the tax rebate wear off. But investors are betting
that the US authorities' boldness will pay off.
===================
FINANCIAL TIMES 15,8,08
Gold slumps below $800 as downturn fears grow
By Neil Dennis

Gold fell below $800 for the first time this year as commodity prices
fell wholesale after the dollar extended its rally amid fears of a
global slowdown.
Spot gold fell 3.6 per cent to $776.90 a troy ounce, its first time
below the $800 level since December, and 24.5 per cent below March’s
record high of $1,030.80.
(- - - - - - -)
Silver’s declines have been even more pronounced. The precious metal
fell 7.6 per cent on Friday to $13.06 an ounce, down 36 per cent from
its March high of $21.24.

Demand has been dulled by fears of a global slowdown, underlined on
Thursday after data showed the eurozone’s economy had contracted for
the first time in the bloc’s nine-year history.

Meanwhile, the recent surge of the dollar has made commodities priced
in the US currency more expensive to buy in other denominations such
as the euro or sterling.

In spite of belligerent hawkishness on inflation from the European
Central Bank, the euro fell 0.6 per cent against the dollar to
$1.4709, and now stands 8.3 per cent below its $1.6038 record hit a
month ago.

Expectations that elevated inflation will force the central bank to
keep raising interest rates and support the euro have completely
faded in the face of growing signs of recession in the eurozone.
”The market no longer believes the ECB’s hawkishness, realising that
it will not be able to hike interest rates even with inflation sticky
above 2 per cent,” said Hans Redeker at BNP Paribas

Dollar strength has also helped support oil prices in recent weeks.
On Friday, Nymex West Texas Intermediate was down a further $1.80 to
$113.19 a barrel and is now off more than 19 per cent from July’s
record of $147.27 a barrel. [Brent Crude today down to $112.64 -cs]