Two reports focussing on what is going on in Europe, with special
emphasis on Spain and Germany . Both reaching into 'severe crisis'
territory but for different reasons.
It’s not a pretty sight anywhere.
XXXXXXXXXXXXXX CS
===================
TELEGRAPH 9.1.09
1.Europe's economy contracts at rates not seen since 1930s
Dire day for Europe as Spain's jobless blasts through 3m and German
industry goes into "free-fall"
By Ambrose Evans-Pritchard, International Business Editor
German exports and industrial orders have both plunged at the
steepest rate since modern records began and Spain's unemployment has
surged above three million, capping one of the most disastrous days
for Europe's economy since the Second World War.
Joaquin Almunia, the European economics commissioner, warned that the
picture would turn "dramatically worse" this year. The eurozone's
confidence index collapsed from 74.9 to 67.1, the lowest since
Brussels started collecting the data in 1985.
"It makes truly dismal reading," said Julian Callow, Europe economist
at Barclays Capital. "Industrial sentiment has never experienced such
a rapid slump. There is an implosion of demand."
Spain lost almost 140,000 jobs in December, pushing unemployment to
3.1m or 13.4pc. The Labour Office said the country had shed a million
in jobs in 2008 as the building boom collapsed. This is equivalent to
7m job losses in the United States.
The Labour Secretary Maravillas Rojo said she could not rule out a
rise in unemployment to 4m this year. "We are in an unprecedented
situation, and 2009 is going to be very difficult," she said.
Madrid now has its hands tied under the constraints of monetary
union. It cannot slash interest rates or devalue, and it has already
exhausted its scope for fiscal stimulus under the EU's Stability
Pact. The one piece of good news is that euribor rates used to price
almost all mortgages in Spain has dropped for 61 days in a row to
2.88pc.
Spain is now in company at last with Germany, where exports plummeted
10.6pc in November. The German economy is highly-geared to the global
industrial cycle and is suddenly facing a vicious downturn as demand
for machinery slumps in China, Russia, the Mid-East, and equally
important as car sales crash in Italy, Spain, and Britain. The
country's trade surplus has shrivelled by a third in one month.
"Industry is in free-fall," said Dirk Schumacher, from Goldman Sachs.
Germany's industrial orders have plummeted 27pc year-on-year,
heralding a drastic economic contraction this year. Berlin is mulling
a €100bn fund to rescue companies in distress, on top of its €50bn
Keynesian blitz over two years. The fiscal package includes tax cuts
and infrastructure spending. Chancellor Angela Merkel's coalition has
backed away from plans to `tough out' the recession after a fierce
criticism from German economists and industrial leaders.
Berlin is now preparing the part-nationalisation of Commerzbank by
taking a 25pc stake in exchange for a €10bn infusion of capital,
helping to boost the bank's capital ratio as it digests Dresdner
Bank. Commerzbank shares fell 14pc.
France is also drawing up plans for a fresh €10.5bn capital injection
for its banks. Jacques Cailloux, from the Royal Bank of Scotland,
said the pace of contraction in Europe is now disturbingly close to
levels seen in the Great Depression. The eurozone bloc shrank by 3pc
in 1930, 5pc in 1931, and 4pc in 1932.
By this count, 2009 could easily match 1930. The latest data points
to 3pc contraction rate since late last year, with no improvement in
sight. "Even the worst case scenarios people talked about now look
too optimistic. But at least the authorities have done enough to
prevent the vicious downward spiral from accelerating. We've haven't
seen the sort of run on bank deposits or mass bankruptices that
occurred in the 1930s. That is crucial," he said.
Elga Bartsch from Morgan Stanley said the European Central Bank may
have to cut rates to 1pc and let its overnight EONIA rate drop to
zero. It has already expanded its balance by 55pcc in a quiet shift
to emergency stimulus, but may now have to go further than it wants
to head off a "deflation trap".
===========
2. Staying out of the euro has spared us a Spanish-style catastrophe
Half-built flats and soaring unemployment show that the boom has
turned to gloom on the Costa del Sol. And it's a fate that could
easily have befallen Britain.
By Jeff Randall
For a place that's called the Sunshine Coast, Spain's Costa del Sol
was unusually wet and cold last week. Friday and Saturday were
particularly miserable in Marbella, as the rain lashed across the
main promenade, forcing restaurants to bring in tables and pull down
shutters.
It was as though the weather gods had decided to reflect the
country's economic outlook – which is becoming darker by the day.
What many in Spain had regarded (foolishly) as an eternal summer of
expansion, driven by a breakneck construction boom, has turned into a
winter of plunging property prices, failing businesses and an
epidemic of redundancies.
Spain's traditional new year greeting is próspero año nuevo. But even
in this part of Andalucia, a favourite playground of wealthy
sunseekers and golf fanatics, it is hard to find locals who are
expecting prosperity in 2009. For a growing number of workers and
small-business owners, anything better than a sharp decline in income
will be greeted as a triumph.
Like the toros bravos that die in the corrida, Spain's bull market
began with impressive vigour but ended up being dragged off through
the dirt. Unemployment hit three million yesterday, about 13 per cent
of the workforce (double the rate in the UK), the worst it has been
for 12 years. Nearly one million of those without jobs have lost them
during the past 12 months.
The speed of descent, from fiesta into crisis, has shocked the
country's political class and commentariat. Inflation has dropped
from 5.3 per cent to 1.5 per cent since the summer. According to the
newspaper El Pais: "This situation was impensable [unthinkable] in
July".
As historians begin to assess damage from the credit crunch, Spain
will surely be singled out as a classic study for what can go wrong
inside a monetary union when the policy requirements of its members
become hopelessly misaligned. It is simply not possible to pursue the
best interests of every participant when some nations are running
trade and fiscal surpluses while others clock up huge deficits.
Ten years after it was launched, the euro is propelling Spain towards
disaster. In giving up control of domestic interest rates to the
European Central Bank, Madrid handed over a vital instrument of
macroeconomic management. It is learning to regret that.
For the early part of this millennium, that loss of power seemed not
to matter: Spain's outrageous (and in some cases illegal)
construction frenzy hid a multitude of sins. At the peak, about
800,000 homes were being built annually on the basis that demand from
foreign buyers was limitless.
That dream has vanished, along with the over-supply of cheap money
that funded it. Drive down the E-15, the main motorway link between
Malaga and Gibraltar, and you will see block after block of half-
built apartments, connected neither to essential utilities nor to
financial reality. They stand as temples to a religion that ceased to
exist when the bubble popped.
The Spanish economy is weak; it needs lower interest rates and a
softer currency. Such a prospect, however, doesn't suit Germany, the
eurozone's dominant force, so Madrid has to sit and suffer while its
people cry for help.
Discomfort is palpable in tourist centres where the purchasing power
of British visitors and second-home owners has played a pivotal role
in boosting local enterprise. Germans and Swedes have been important,
also, but it is on the British that the leisure sector in southern
Spain has depended most.
A quick scan of the exchange-rate charts explains why. In the summer
of 2000, about 18 months after it was launched, the euro was out of
fashion on the world's currency markets. At that time, £1 bought
€1.75, making British travellers feel especially wealthy when
holidaying in Spain.
Today, however, as the British economy sinks into recession,
prompting the Bank of England to slash interest rates to 1.5 per cent
(the lowest level in the central bank's 315-year history), it is
sterling that looks like a six-stone weakling.
Many in the queue at Gatwick airport's Travelex desk last weekend
were shocked to discover that the pound had fallen to below parity
against the euro. For them, Spain has become an expensive experience.
Old jokes about Costa Notta Lotta are no longer relevant, much less
funny.
I was treated by a friend to a round of golf at Rio Real, a middle-
ranking course, that is by no means among the priciest. He was
charged £172 for two (no buggy). Dinner for three in a modest pizza
joint came to £75. One must assume that hoteliers from Morecambe to
Margate are cheering wildly.
Competing currencies invariably fluctuate on a daily basis, but not
all in the City are expecting a swift recovery of sterling against
the euro (even though it has picked up in the past few days). HSBC
believes: "In the UK… a weaker currency seems desirable to policy
makers… in our eyes all roads lead to a stronger euro."
If that analysis proves correct, parts of Spain will face
devastation, and social policies that seemed generous during the go-
go years will quickly become unaffordable. For example, in some
instances the state pays 70 per cent of salary for up to two years
when a worker is made unemployed. How will that be funded if, as some
are predicting, Spain's jobless total reaches four million in 2010?
Adding to Madrid's woes is the extraordinary influx of five million
immigrants, who boosted the population by about 15 per cent between
1998 and last year. It was always assumed that in tough times many
would return home. But for penniless fruit pickers from Africa, life
in Spain, even in the harshest economic climate, is often better than
what they left behind. The number of foreigners claiming dole
payments has doubled and there are mounting tensions as native job-
seekers slip down the food chain.
Marbella is not used to life on a budget. Shopkeepers, newspaper
vendors and bar staff seem baffled by the downturn in their fortunes.
On Sunday, my family and I had dinner in a seafront bodega and were
the only customers all night. "What has happened to los Ingleses?"
asked the waiter.
The answer is that the United Kingdom never joined the euro. As a
result, our government and monetary authorities are free to adopt
policies that suit our needs. In today's circumstances, that means
the freedom to live with a devaluing currency. This hurts those of us
who can still afford to visit Spain, and is unfortunate for British
pensioners living abroad, but is a small price to pay for the revival
of our domestic industries.
Had Britain been locked into Europe's single currency, at an exchange
rate far higher than today's, there is good reason to believe that
we, too, would be suffering double-digit unemployment. You won't read
this very often under my byline, but Gordon Brown played a blinder in
keeping us out. [He didn’t do it for Britain. He did it to avoid
political disaster at home -cs]
emphasis on Spain and Germany . Both reaching into 'severe crisis'
territory but for different reasons.
It’s not a pretty sight anywhere.
XXXXXXXXXXXXXX CS
===================
TELEGRAPH 9.1.09
1.Europe's economy contracts at rates not seen since 1930s
Dire day for Europe as Spain's jobless blasts through 3m and German
industry goes into "free-fall"
By Ambrose Evans-Pritchard, International Business Editor
German exports and industrial orders have both plunged at the
steepest rate since modern records began and Spain's unemployment has
surged above three million, capping one of the most disastrous days
for Europe's economy since the Second World War.
Joaquin Almunia, the European economics commissioner, warned that the
picture would turn "dramatically worse" this year. The eurozone's
confidence index collapsed from 74.9 to 67.1, the lowest since
Brussels started collecting the data in 1985.
"It makes truly dismal reading," said Julian Callow, Europe economist
at Barclays Capital. "Industrial sentiment has never experienced such
a rapid slump. There is an implosion of demand."
Spain lost almost 140,000 jobs in December, pushing unemployment to
3.1m or 13.4pc. The Labour Office said the country had shed a million
in jobs in 2008 as the building boom collapsed. This is equivalent to
7m job losses in the United States.
The Labour Secretary Maravillas Rojo said she could not rule out a
rise in unemployment to 4m this year. "We are in an unprecedented
situation, and 2009 is going to be very difficult," she said.
Madrid now has its hands tied under the constraints of monetary
union. It cannot slash interest rates or devalue, and it has already
exhausted its scope for fiscal stimulus under the EU's Stability
Pact. The one piece of good news is that euribor rates used to price
almost all mortgages in Spain has dropped for 61 days in a row to
2.88pc.
Spain is now in company at last with Germany, where exports plummeted
10.6pc in November. The German economy is highly-geared to the global
industrial cycle and is suddenly facing a vicious downturn as demand
for machinery slumps in China, Russia, the Mid-East, and equally
important as car sales crash in Italy, Spain, and Britain. The
country's trade surplus has shrivelled by a third in one month.
"Industry is in free-fall," said Dirk Schumacher, from Goldman Sachs.
Germany's industrial orders have plummeted 27pc year-on-year,
heralding a drastic economic contraction this year. Berlin is mulling
a €100bn fund to rescue companies in distress, on top of its €50bn
Keynesian blitz over two years. The fiscal package includes tax cuts
and infrastructure spending. Chancellor Angela Merkel's coalition has
backed away from plans to `tough out' the recession after a fierce
criticism from German economists and industrial leaders.
Berlin is now preparing the part-nationalisation of Commerzbank by
taking a 25pc stake in exchange for a €10bn infusion of capital,
helping to boost the bank's capital ratio as it digests Dresdner
Bank. Commerzbank shares fell 14pc.
France is also drawing up plans for a fresh €10.5bn capital injection
for its banks. Jacques Cailloux, from the Royal Bank of Scotland,
said the pace of contraction in Europe is now disturbingly close to
levels seen in the Great Depression. The eurozone bloc shrank by 3pc
in 1930, 5pc in 1931, and 4pc in 1932.
By this count, 2009 could easily match 1930. The latest data points
to 3pc contraction rate since late last year, with no improvement in
sight. "Even the worst case scenarios people talked about now look
too optimistic. But at least the authorities have done enough to
prevent the vicious downward spiral from accelerating. We've haven't
seen the sort of run on bank deposits or mass bankruptices that
occurred in the 1930s. That is crucial," he said.
Elga Bartsch from Morgan Stanley said the European Central Bank may
have to cut rates to 1pc and let its overnight EONIA rate drop to
zero. It has already expanded its balance by 55pcc in a quiet shift
to emergency stimulus, but may now have to go further than it wants
to head off a "deflation trap".
===========
2. Staying out of the euro has spared us a Spanish-style catastrophe
Half-built flats and soaring unemployment show that the boom has
turned to gloom on the Costa del Sol. And it's a fate that could
easily have befallen Britain.
By Jeff Randall
For a place that's called the Sunshine Coast, Spain's Costa del Sol
was unusually wet and cold last week. Friday and Saturday were
particularly miserable in Marbella, as the rain lashed across the
main promenade, forcing restaurants to bring in tables and pull down
shutters.
It was as though the weather gods had decided to reflect the
country's economic outlook – which is becoming darker by the day.
What many in Spain had regarded (foolishly) as an eternal summer of
expansion, driven by a breakneck construction boom, has turned into a
winter of plunging property prices, failing businesses and an
epidemic of redundancies.
Spain's traditional new year greeting is próspero año nuevo. But even
in this part of Andalucia, a favourite playground of wealthy
sunseekers and golf fanatics, it is hard to find locals who are
expecting prosperity in 2009. For a growing number of workers and
small-business owners, anything better than a sharp decline in income
will be greeted as a triumph.
Like the toros bravos that die in the corrida, Spain's bull market
began with impressive vigour but ended up being dragged off through
the dirt. Unemployment hit three million yesterday, about 13 per cent
of the workforce (double the rate in the UK), the worst it has been
for 12 years. Nearly one million of those without jobs have lost them
during the past 12 months.
The speed of descent, from fiesta into crisis, has shocked the
country's political class and commentariat. Inflation has dropped
from 5.3 per cent to 1.5 per cent since the summer. According to the
newspaper El Pais: "This situation was impensable [unthinkable] in
July".
As historians begin to assess damage from the credit crunch, Spain
will surely be singled out as a classic study for what can go wrong
inside a monetary union when the policy requirements of its members
become hopelessly misaligned. It is simply not possible to pursue the
best interests of every participant when some nations are running
trade and fiscal surpluses while others clock up huge deficits.
Ten years after it was launched, the euro is propelling Spain towards
disaster. In giving up control of domestic interest rates to the
European Central Bank, Madrid handed over a vital instrument of
macroeconomic management. It is learning to regret that.
For the early part of this millennium, that loss of power seemed not
to matter: Spain's outrageous (and in some cases illegal)
construction frenzy hid a multitude of sins. At the peak, about
800,000 homes were being built annually on the basis that demand from
foreign buyers was limitless.
That dream has vanished, along with the over-supply of cheap money
that funded it. Drive down the E-15, the main motorway link between
Malaga and Gibraltar, and you will see block after block of half-
built apartments, connected neither to essential utilities nor to
financial reality. They stand as temples to a religion that ceased to
exist when the bubble popped.
The Spanish economy is weak; it needs lower interest rates and a
softer currency. Such a prospect, however, doesn't suit Germany, the
eurozone's dominant force, so Madrid has to sit and suffer while its
people cry for help.
Discomfort is palpable in tourist centres where the purchasing power
of British visitors and second-home owners has played a pivotal role
in boosting local enterprise. Germans and Swedes have been important,
also, but it is on the British that the leisure sector in southern
Spain has depended most.
A quick scan of the exchange-rate charts explains why. In the summer
of 2000, about 18 months after it was launched, the euro was out of
fashion on the world's currency markets. At that time, £1 bought
€1.75, making British travellers feel especially wealthy when
holidaying in Spain.
Today, however, as the British economy sinks into recession,
prompting the Bank of England to slash interest rates to 1.5 per cent
(the lowest level in the central bank's 315-year history), it is
sterling that looks like a six-stone weakling.
Many in the queue at Gatwick airport's Travelex desk last weekend
were shocked to discover that the pound had fallen to below parity
against the euro. For them, Spain has become an expensive experience.
Old jokes about Costa Notta Lotta are no longer relevant, much less
funny.
I was treated by a friend to a round of golf at Rio Real, a middle-
ranking course, that is by no means among the priciest. He was
charged £172 for two (no buggy). Dinner for three in a modest pizza
joint came to £75. One must assume that hoteliers from Morecambe to
Margate are cheering wildly.
Competing currencies invariably fluctuate on a daily basis, but not
all in the City are expecting a swift recovery of sterling against
the euro (even though it has picked up in the past few days). HSBC
believes: "In the UK… a weaker currency seems desirable to policy
makers… in our eyes all roads lead to a stronger euro."
If that analysis proves correct, parts of Spain will face
devastation, and social policies that seemed generous during the go-
go years will quickly become unaffordable. For example, in some
instances the state pays 70 per cent of salary for up to two years
when a worker is made unemployed. How will that be funded if, as some
are predicting, Spain's jobless total reaches four million in 2010?
Adding to Madrid's woes is the extraordinary influx of five million
immigrants, who boosted the population by about 15 per cent between
1998 and last year. It was always assumed that in tough times many
would return home. But for penniless fruit pickers from Africa, life
in Spain, even in the harshest economic climate, is often better than
what they left behind. The number of foreigners claiming dole
payments has doubled and there are mounting tensions as native job-
seekers slip down the food chain.
Marbella is not used to life on a budget. Shopkeepers, newspaper
vendors and bar staff seem baffled by the downturn in their fortunes.
On Sunday, my family and I had dinner in a seafront bodega and were
the only customers all night. "What has happened to los Ingleses?"
asked the waiter.
The answer is that the United Kingdom never joined the euro. As a
result, our government and monetary authorities are free to adopt
policies that suit our needs. In today's circumstances, that means
the freedom to live with a devaluing currency. This hurts those of us
who can still afford to visit Spain, and is unfortunate for British
pensioners living abroad, but is a small price to pay for the revival
of our domestic industries.
Had Britain been locked into Europe's single currency, at an exchange
rate far higher than today's, there is good reason to believe that
we, too, would be suffering double-digit unemployment. You won't read
this very often under my byline, but Gordon Brown played a blinder in
keeping us out. [He didn’t do it for Britain. He did it to avoid
political disaster at home -cs]
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