June 1, 2012

Dithering Deepens, Spreads Eurozone Crisis

Merkel isolated on austerity as slowdown grinds through Asia

The European Central Bank headquarters in Frankfurt. (Photo: AP) The European Central Bank headquarters in Frankfurt. (Photo: AP)

Calls for action seem to be everywhere throughout the eurozone with the exception of Germany, where Chancellor Angela Merkel’s insistence on adhering to austerity is increasingly isolating her from the rest of the region. And as worries rise over financial catastrophe, the slowdown that has afflicted much of the global economy is taking its toll as far away as Asia, where in China the purchasing managers’ index fell below economists’ expectations.

Bloomberg reported Friday that Italy went on the attack against Merkel, with Prime Minister Mario Monti saying that Merkel’s determination to bring about a stable eurozone economy “risks being undermined because of lack of promptness in setting up the necessary instruments to limit the contagion.” He also advocated formulating a plan for common borrowing, a policy Merkel strongly opposes.

He was quoted saying on Thursday to a European Parliament committee in Brussels, “Countries that are at the core of the system and which have had the huge merit of instilling the culture of stability to the European Union in the first place, most notably Germany, should really reflect deeply but quickly. Europe should really accelerate the efforts, as the European Commission is doing, in order to limit the contagion.”

Mario Draghi, head of the European Central Bank (ECB), added to the clamor, telling the committee that unless policymakers took more aggressive action, the euro “is being shown now to be unsustainable unless further steps are being undertaken.”

He added that it was not the mission of the ECB to compensate for policy failings in the eurozone. “It’s not our duty, it’s not in our mandate” to “fill the vacuum left by the lack of action by national governments on the fiscal front,” on “the structural front, and on the governance front,” he said in the report.

On Wednesday the European Commission (EC) had proposed Europe-financed bank recapitalizations and the development of a timetable for euro bonds. Merkel flatly rejected such ideas, and on Thursday suggested a timeline of “5 to 10 years” to fix the problems the crisis has revealed in the joint currency.

Monti, Draghi and Bank of Italy Governor Ignazio Visco all urged Merkel to support the EC’s proposal to permit the banks to receive money directly from the European Stability Mechanism (ESM) instead of having to go through governments.

“People are actually working on finding ways that the ESM could be used to recapitalize banks,” Draghi said in the report. “The issue is not so much the use of ESM money to recapitalize banks but whether this could be done directly without having to go to governments.” He added that if creditor nations like Germany and Finland kept insisting that they had to have input before money could be issued, there is a risk that “we have a big pot of money but nobody can touch it.”

The likelihood that Ireland gave a yes vote to its Thursday referendum on the European budget discipline treaty passed nearly unnoticed, according to Reuters, with markets far more worried about the outcome of a second election in Greece in the days to come and continuing problems in Spain.

Eurozone unemployment, at a record high of 11%, according to Eurostat, was led by Spain with a rate of 24.3% in April. Figures were not available for Greece, although in February its unemployed totaled 21.7% of the population. In both Italy and France the April rate rose to 10.2%. That is the highest rate for Italy in 12 years. Germany and Austria both saw their unemployment rates fall, the former to 5.4% and the latter to 3.9%.

Unsurprisingly, consumer confidence in Italy fell in May to a level it has not seen in more than 15 years. Business confidence also dropped, hitting its lowest level since August 2009. High unemployment combined with tax increases and levies on gas prices have weighed on consumers and businesses alike. Two earthquakes in northern Italy in May also took a toll on industrial output, according to Rome-based employers lobby Confindustria, which said a decline of 0.6% was likely.

The U.K., already in a recession, saw its purchasing managers' index shrink in May for the first time this year, to its lowest level since May of 2009.  It came in at 45.9 from 50.2 in April. Since Britain relies heavily on the eurozone to buy its exports, the trend looks likely to continue. Even emerging markets such as Brazil and Russia were slower.

Economic woes have spread to Asia, where Bloomberg reported Friday that a slowdown has hit not only China, but also India, South Korea and Taiwan. China’s PMI, according to China’s statistics bureau and logistics federation, fell to 50.4 in May from 53.3 in April. Economists polled by Bloomberg had expected a PMI of 52. “This set of data is very bad,” Hong Kong-based Credit Suisse economist Dong Tao said in the report. “China now needs some highly symbolic policy moves.”

Tirthankar Patnaik, a Mumbai-based strategist at Religare Capital Markets, said in advance of the figures on India that “the outlook for growth in the short term is very bad. Industrial growth is slowing down and investments are not taking place.”

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