Friday, April 25, 2008

The wheels are coming off …

"The wheels are coming off the eurozone economy," says David Owen, an economist at Dresdner Kleinwort – as retailed by Ambrose Evans-Pritchard in The Daily Telegraph today.

This is good news for Eurosceptics – if it is true – who (rightly) detest the euro as a political project designed primarily to promote the cause of European political integration. But it is also bad news for all of us. No one – or certainly not mere mortals like ourselves – benefits from economic disruption.

Furthermore, since Ambrose is always predicting the collapse of the euro (he is right, of course – it is just a matter of "when" rather than "whether"), many caution that his words should be taken with the proverbial pinch of salt.

Nevertheless, the piece starts with a core of indisputable fact, which makes for sober reading. The euro has suffered its sharpest drop in four years, writes Ambrose, "as a blizzard of weak data from Germany, Belgium, France, and Spain spark fears that economic contagion may be spreading from the Anglo-Saxon world to Europe."

He picks up on the continuing economic trauma in Spain, telling us that the Spanish business federation warned that it unemployment will rise by 500,000 by the summer unless the government takes "valiant measures" to offset the housing and construction crash.

We also learn that the country's credit group ASNEF is reporting that the volume of personal loans had dropped 30 percent in the first quarter, the worst performance since the country's financial crisis in the early 1990s.

Troubling data in Spain has been building for months, Ambrose then writes (which we have been following) but investors have tended to focus on Germany as a proxy for the whole eurozone.

What has changed is that there has been a shock drop in Germany's IFO business confidence index yesterday, caused an abrupt change of mood in the currency markets. The euro plunged to $1.5646 against the dollar, down from its all-time peak of $1.6018 on Tuesday. It is still 27 percent above its level two years ago.

The German data follows a slide in the Belgian index, which captures crucial port activity in Antwerp. The headline confidence figure fell to -7.4 in April from plus 1.2 in March, with a dramatic slump in the export order books to -14. This is flashing near-recession warnings, Ambrose tells us.

It is then that he quotes David Owen, his economist at Dresdner Kleinwort, saying that Europe would soon be engulfed by the twin effects of a "collapse in export volumes" and a slow motion credit squeeze, offering our opening quote: "The wheels are coming off the eurozone economy."

What is then interesting is that Ambrose retails a warning from BNP Paribas that the "decoupling story" was no longer credible. This is the fiction that somehow the European economy works to rules different from that governing the US and global economies and is thus insulated from the financial turnoil afflicting the rest of us.

BNP Paribas is pretty brutal on this score, puncturing the hubris with the blunt statement that: "We see Europe in the early stage of a credit crunch, and if we are right credit supply will shut down."

On cure, we find that, "Key governors of the European Central Bank began to back away from their hawkish stance of recent weeks, clearly disturbed by the market perception that they are mulling a rate rise to choke off price rises. Inflation has reached a post-EMU high of 3.6 percent on surging oil and food costs."

Then there is Eric Chaney, Europe strategist at Morgan Stanley, who says the April survey by French corporate treasurers was "alarming", pointing to distress in the financial system. "Let's call a spade a spade, some sort of credit crunch is unfolding in the funding of French companies," he says.

Ambrose elaborates on his views on his blog, eliciting a number of informed (and some less-informed) comments, which make it clear that we are in for some interesting times.

But whether we are any closer to a denoument is, as always, anyone's guess.

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