Hopes that Europe’s battered economies might be about to turn themselves around took another sharp knock today (Friday), as the preliminary flash reading on the purchasing manager survey signaled that activity in both the manufacturing and the services sectors are contracting at a new record pace in February.

The preliminary Markit euro-zone manufacturing purchasing managers index, or PMI, fell to a record low of 33.6 in February from 34.4 in January, while the services PMI also fell to a record low, dropping to 38.9 from 42.2 in January. As a consequence the euro-zone composite PMI reading dropped to its own record low of 36.2 from 38.3 in January. Any reading below 50 on these indexes indicates month on month contraction.

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For those of you who haven’t seen it yet, go make your day, and take a look at what gets to happen next (courtesy of Calculated Risk).

Of course, if all that tackle really does get as stuck as we fear it might, well, we could try using Uncle Ben’s helicopter to tow them out (hat tip to Canucklehead in comments).

Well, I think it is now obvious that (following the articles from Munchau and Soros, and a string of leaders on the general topic of how the Eurozone need to strengthen its architecture) that the Financial Times has thrown its full weight behind the campaign for a new initiative on the European Bonds front, but what about that other stalwart of the UK Economic and Financial media? It seems to me they have yet to position themselves (unless anyone can point me in the way of something to the contary).

In this weeks Europe section, The Economist does find the time for a lengthy piece on Michael Glos’s resignation, although they do seem to miss the possibility that his leaving may have something to do with an off-stage rumpus about what Germany may and may not sign up to, preferring rather to draw our attention to his succesor’s blue blood and the fact that he has ten names. Or there is an article on euthanasia in Italy ( The Economist, understandably, never misses the opportunity to take a dig at Italy’s political class, who get so embroiled in the Eluana Englaro issue at a time when Italy’s economy is, once more, sinking fast). Or there is an article which explains how once the Balkans sneezes it then goes on to get pneumonia, but the rest of the EU no longer catches a cold.

But of the fact that there is a second round of bank bailouts coming, that German ministers are talking about bailing out whole states, that there is a lively and perfectly healthy debate taking place about whether or not the issue of Community backed bonds might help to stabilise yield spreads, of all this I can’t find any mention. Helloo, is anybody there?

George Soros has an opinion editorial in the Financial Times today endorsing the call for EU Bonds. Apart from the fact that he, more than anyone, should be aware of just how dramatically pressure in financial markets can lead to the break-up of a common monetary system, the article makes many valid points, including the following one, which I think is very much the heart of the matter:

Two thorny issues would need to be resolved – one is the allocation of the debt burden among member states and the other is the relative voting power of the different eurozone finance ministers. The existing precedents, namely the EU’s budget and the composition of the ECB, would be considered unfair and unacceptable by Germany. But many member states will balk at agreeing to a solution that changes the balance of power within the EU. Never­theless some concessions would have to be made to bring Germany on board. Usually it takes a crisis to bring about a compromise but the crisis is now brewing and the sooner it is resolved the better.

At the present time Soros is limiting himself to simply eurozone countries. I would go further, and bring all EU member states in on the act. The UK, Sweden and Denmark are in no position to quibble at this point, and in particular the UK, which may itself be in danger of receiving sovereign downgrades if it stands alone. So strike while the iron is hot, I say. There is nothing like a crisis to bring us all together (or send us all off spinning apart). The question of who will assume which parts of the debt is, as Soros says, a tricky one, but I would just reiterate the closing paragraphs of my post yesterday, since I think that if this is all well drafted, financial controls may well become much, much tougher, and not vice versa.

Given the difficult, and unforseen, pressure we are all up against, this [the initiation of excess deficit procedures] is, quite frankly ridiculous. Not that rising fiscal deficits, and rising debt to GDP ratios, are something we should be casual about, but I think what we need is a certain loosening of the rules in the short term, to be followed by a much stricter tightening as we move forward. And do you know the mechanism I would use to discipline the reluctant states when it comes to paying off the accounts run up during the emergency? Why yes, you’ve got it, the availability of those much-easier-to-finance EU backed bonds.

You see while the first argument in favour of EU bonds may be an entirely pragmatic one, namely that it doesn’t make sense for subsidiary components of EU Inc. to be paying more to borrow their money when the credit guarantee of the parent entity can get it for them far cheaper, the longer term argument in favour is that it may well enable the EU Commission to become something it has long dreamed of becoming – an internal credit rating agency for EU national debt. Basically in the mid term the EU bonds system can only work if it is backed by a very strong Lisbon type reform pact for those countries who apply to make use of the facility. This is what now needs to be worked on. And how do we know that that there won’t be yet another round of backsliding on all this? Well we don’t, this is the risk we just have to take, but sometimes you do need to simply cross your fingers and jump, since the burning building behind you looks none to attractive either, but what we do know is that since there will now be a mechanism whereby the bad behaviour of the few really can penalise the many financially, then there really will be some meaningful incentive to generate a pact, this time, that really has teeth to stop that penalisation taking place.

Wolfgan Munchau was complaining only last weekend about the extraordinary narrow-mindedness of Europe’s economic and political leadership in the face of the current financial and economic crisis, from Ireland in the West to Hungary in the East, and from Greece in the South to Sweden in the North. But more than narrow mindedness what we are faced with is innocence and inability to react, and frankly I am not sure which is worst. I say “innocence” because it is by now abundantly clear that they simply haven’t yet grasped the severity of the problems we face (in countries like Spain, or even Germany itself, let alone in the East), and I say inability to react, since they are always and forever moving too little and too late. The initial response to the banking crisis last October was one example (where we saw a landshift-style volte face in the space of only one week) and the way we are now confronting the need to live up to the promises then made about guaranteeing the banking sector, and in particular the “systemic” banks, would be another.

The complete confusion which seems to reign over at the ECB about whether or not the Eurozone can operate some sort of US/Japanese style quantitative easing would be a third. Continue reading →

Well, Paul Krugman certainly got it right on this one, the Great Depression may now reasonably be considered to have arrived in Ukraine. Ukraine’s GDP declined 20 percent in January year-on-year, according to Valeriy Lytvytsky chief advisor to the chairman of the National Bank of Ukraine. “The decline in GDP in January was about 20 percent according to my reckoning. It’s the biggest drop ever. It’s a bad start,” he said. According to Lytvytsky the construction and industry sectors have been the hardest hit by the economic crisis.

The Statistics Office don’t produce detailed information on the month by month movements in GDP, but using the raw data they do provide I have calculated the monthly growth rates, and have produced the chart below, which gives a pretty clear idea of what has been happening.

Industrial output fell in January for the sixth month in a row, with a 16.1 percent decline between January and December 2008. This was the biggest decrease since January 1994, when there was an 18.6 percent drop. Industrial production in January was 34.1 percent down on January 2008. The year-on-year decline in construction also increased ten-fold, hitting 57.6 percent, Lytvytsky said.

“At the start of last year there was one sector in recession – construction. All the rest were in positive territory. Now only one economic sector is growing – agriculture – with growth of 0.5 percent, within the margin of error. All the other basic industries, which account for about 80 percent of GDP, are contracting.”
Valeriy Lytvytsky

Unfortunately this may well be the last month for which I can do this kind of calculation and comparison, since the State Statistics Committee will not be publishing monthly GDP results (as in the past), starting this January and (ironically) as a result of the move to harmonise Ukraine methodology with international-standard, quarterly reporting. I say ironically, since in this case we will be trading short term insight for longer term precision. However, the office will continue publishing monthly results for individual economic sectors like agriculture, industry, construction and transportation, so we maywell be able to invent some kind of “proxy”, just to keep an eye on what is happening in more or less real time.

“I would now expect several eurozone countries with weak banking sectors to get into serious difficulties as the crisis continues. There is a risk of cascading sovereign defaults. If this was limited to countries of the size of Ireland or Greece, one could solve this problem through a bail-out. But solvency risk is not a problem confined to small countries. The banking sectors in Italy, Spain and Germany are increasingly vulnerable.”
Wolfgang Munchau, Financial Times, 15 February 2009.

German Finance Minister Peer Steinbrueck said on Monday euro zone countries would have to pull together if one of them faced a “serious situation,” adding that Ireland was in a “difficult situation.”

Investors are increasingly concerned that Ireland may default on its national debt as the government pledges more money to help troubled banks, the Sunday Times said. Credit-default swaps on Ireland’s government bonds reached record levels last week as debt investors rate the nation as Europe’s most-troubled economy, the paper said. Ireland has pledged financial help for lenders that would be more than double its annual economic output and the loans held by its banks are more than 11 times the size of its economy, the report said. Credit-default swaps on the five-year sovereign debt of Ireland, which is rated AAA by Fitch Ratings, jumped 49 basis points on Feb. 13 to a record 377, according to CMA Datavision prices. That’s 18 basis points more than the cost to protect the debt of Costa Rica, which Fitch rates BB, or 11 grades lower than AAA, from default.
Bloomberg, 16 February 2009

Well push is, I think, now getting much much nearer to shove time, and we now wait restlessly to know what EU leaders are going to offer in the way of a second round of bank bailouts at the end of this month. As I argue in this post, and as Munchau also suggests, more than sweet words will be needed to honour the commitment made on October 12 2008 in Paris that no “systemic” EU bank would be allowed to fail, as a minimum we need a comprehensive mechanism financed by the issuing of EU bonds. Continue reading →

Well, it isn’t only in Europe that we are having a hard time of things. Last week Kazuo Momma, head of the Bank of Japan’s research and statistics department, warned that Japan’s economy now faced an “unimaginable” contraction, and today we can begin to see just what the unimaginable might look like, since the preliminary data for fourth quarter GDP are now out. And what we find when we come to stare the unimaginable in the face is that Japan’s economy contracted by 3.3 per cent in the three months to December (compared with the previous quarter), effectively the country’s worst economic performance in 35 years.

On an annualised basis, gross domestic product declined at a rate of 12.7 per cent, a number which perhaps better than any other highlights the depth and severity of a slump that has surely now dispelled all those early hopes that the global economy might be able to shrug off the effects of the financial crisis just like that. To puts things in a comparative setting, the contraction was three times as bad as that of the US in the same quarter. Year on year GDP was down by 4.6%.

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