It’s off to the races for a while in the euro zone as the adjustment that began when the ECB started buying member nation debt continues, and the still large budget deficits support incomes and growth while the still low euro supports exports.

Fears of solvency risks for govts and the banking system are fading fast.

The euro meanwhile will continue to adjust/appreciate with a small lag in response to rising net exports and ultimately keep a lid on them.

If US jobless claims are up it’s good for US stocks, as unemployment is perceived to keep labor costs and interest rates down.
If claims are down it’s good for stocks as it’s evidence of a bit more top line growth, which trumps any fears of damage from interest rate hikes.

China weakness serves to keep a lid on resource costs which is good for stocks.

Earnings season has confirmed that business has figured out how to make money in the current environment, supported by 8%+ federal deficits that is also supporting 4% personal income growth as well as nominal and real GDP growth.

Unemployment working its way lower in tiny increments unfortunately causes politicians and mainstream economists to think their measures are ‘working,’ including revised down deficit projections from the automatic stabilizers, and that it all just need lots of time due to the severity of the downturn.

This is very good for stocks which further supports the political desire to prove themselves right. And it is very bad for people forced to wait years before their lives can begin to recover, as with modest improvement in GDP a fiscal adjustment that could drastically accelerate the move back to full employment is highly unlikely.

At age 60, it’s not looking like I’ll get to experience how good this economy could be for everyone if we understood monetary operations and reserve accounting.

EU Headlines

Europe Economic Confidence Rises as Exports Improve

ECB Puts Bigger Discounts on Low-Quality Collateral

German Unemployment Fell for 13th as Exports Boom

Lagarde Predicts Significant Pickup in World Growth

Berlusconi Survives Confidence Vote to Pass Deficit Reductions

Italian Business Confidence Rises to Two-Year High on Exports

Inflation in Spain at highest point in 18 months

As previously discussed, the recovery looks real to me, firmly supported by very high public sector deficits, and the implied support of the ECB which continues to stand by to fund the banking system as well as to buy national govt debt in the secondary markets as needed.

Yes, there are downside risks from external shocks and from future fiscal consolidation, but there are also offsetting upside risks to forecasts as well.

EU Headlines:

European Loan Growth Accelerated in June as Economy Recovered

EU Tests Get Positive Response From Finance Firms, BofA Says

Basel Committee Agrees New Bank Capital Rules

Germany Refuses to Sign Parts of New Basel Accord, WSJ Says

Germany warned of ‘big challenges’ ahead

German consumer confidence up strongly

Spanish Debt Costs Fall in First Auction Since Stress Tests

This is what I was writing about last week-

China and others buying euro to support exports to that region.

The euro member nations want their debt sold, but they don’t want the loss of ‘competitiveness’ that necessarily comes with it, as the moves to eliminate solvency issues continue to drive up the euro:

China offers vote of confidence in euro

(FT) China delivered a strong vote of confidence in the euro on Friday when Premier Wen Jiabao said that Europe would always be one of the main investment markets for China’s foreign exchange reserves. Mr Wen said “Europe will certainly overcome its difficulties”. “The European market has been in the past, is now and will be in the future one of the main investment markets for China’s foreign exchange reserves,” Mr Wen said. “I want to say that at this time, when some European countries are suffering sovereign debt crises, China has always held out a helping hand,” he added. “We believe that with the joint hard work of the international community, Europe will certainly overcome its difficulties,” he said. According to people familiar with Spain’s recent bond issue, China’s State Administration of Foreign Exchange was allocated up to €400m ($505m) of Spanish 10-year bonds in a debt deal last Tuesday.

Asian players are a worry for eurozone

By Gillian Tett

July 14 (FT)

The saga behind next week’s stress test release is a case in point. During most of the past year, governments of countries such as Germany, Spain and France have resisted the idea of conducting US-style stress tests on their banks, in spite of repeated, entreaties from entities ranging from the International Monetary Fund to the Bank for International Settlements, and the US government.


However, after a meeting of G20 leaders in Busan last month, those same eurozone governments performed a U-turn, by finally agreeing to publish the results of such tests.


Some observers have blamed the volte-face on lobbying inside the senior echelons of the European Central Bank. Others point the finger to American pressure. In particular, Tim Geithner, the US Treasury secretary, had some strongly worded discussions with some of his eurozone counterparts in Busan, where he urged – if not lectured – them to adopt these tests.

However, Europeans who participated in the Busan meeting say it was actually comments from Asian officials that created a tipping point. In the days before and after that G20 gathering, eurozone officials met powerful Asian investment groups and government officials who expressed alarm about Europe’s financial woes. And while those officials did not plan to sell their existing stock of bonds, they specifically said they would reduce or halt future purchases of eurozone bonds unless something was done to allay the fears about Europe’s banks.

That, in turn, sparked a sudden change of heart among officials in places such as Germany and Spain. After all, as one European official notes, the last thing that any debt-laden European government wants now is a situation where it is tough to sell bonds. “It was the Asians that changed the mood, not anything Geithner said,” says one eurozone official.

This raises some fascinating short-term issues about how the bond markets might respond to the stress tests. It is impossible to track bond purchase patterns with any precision in a timely manner in Europe, since there is no central source of consolidated data.

However, bankers say there are signs that Asian investors are returning to buy eurozone bonds. This week, for example, China’s State Administration of Foreign Exchange bid for €1bn (£1.27bn, £835m) of Spanish bonds, helping to produce a very successful auction.

Yes, it’s a two edged sword.

Asian nations want to accumulate euro net financial assets to facilitate exports to the euro zone.

Before the crisis euro nations were concerned that the strong euro, partially due to Asian buying, was hurting euro zone exports

However, as the crisis developed, euro nations got to the point where they were concerned enough about national govt solvency and the precipitous fall of the euro (which was in some ways welcomed by exporters but worrying with regards to a potential inflationary collapse) to agree to measures to support their national govt debt sales which also meant a stronger euro.

So now the pendulum is swinging the other way. Solvency issues have been sufficiently resolved by the ECB to avert default, but at the ‘cost’ of a resumption Asian buying designed to strengthen the euro to support Asian exports to the euro zone.

As before the crisis, however, the euro zone has no tools to keep a lid on the euro (apart from re introducing the solvency issue to scare away buyers, which makes no sense), as buying dollars and other fx is counter to their ideology of having the euro be the world’s reserve currency.

So the same forces remain in place that drove the euro to the 150-160 range, which kept net exports from climbing.

The export driven model is problematic enough without adding in the additionally problematic idiosyncratic financial structure of the euro zone.

As for the stress tests, as long as the ECB is funding bank liabilities and buying national govt debt banks and the national govts can continue to fund themselves with or without Asian buying.

I’d have to say at this point in time the euro zone hasn’t gotten that far in their understanding of their monetary system or they probably would not be making concessions to outside forces.

I got a nice mention in a CNBC article today:

Why Portugal Downgrade Didn’t Slam Stocks

By Antonia Oprita

July 13 (CNBC) — Investors do not see Portugal’s rating downgrade by Moody’s as an event that will shake the markets, but it confirms the fact that the outlook for some economies in the euro zone is still cloudy, economists and market analysts told CNBC Tuesday.

Moody’s slashed Portugal’s credit rating by two notches to A1, citing a deterioration of the country’s debt ratios and weak growth prospects.

Portugal’s debt-to-GDP and debt-to-revenue ratios have risen rapidly in the past two years, Anthony Thomas, vice president and senior analyst in Moody’s Sovereign Risk Group, said in a statement.

The euro fell after the announcement and the spread between Portuguese and German 10-year government bonds widened by 4 basis points to 290 points.

“The bond markets response hasn’t been dramatic,” Martin van Vliet, euro-zone economist at ING Bank, told CNBC.com.

The downgrade came a little before a Greek auction to sell 6-month T-bills, the first since a bailout package agreed by the European Union and the International Monetary Fund in May.

Greece sold 1.625 billion euros ($2.03 billion) of 6-month instruments at a yield of 4.65 percent, up from 4.55 percent in a similar auction on April 13, according to Reuters.

“The markets will probably reason that the risk of default in six months is small,” van Vliet said.

Growth Is Key

Economic growth in Europe’s peripheral countries will be crucial to bring back investor confidence but more and more analysts fear a slowdown in the second quarter everywhere in the world.

“The outlook for Portugal is not particularly optimistic,” David Tinsley, economist at National Bank of Australia, said. “It is in a very slow growth trajectory and therefore all its fiscal retrenchment has got to come from public spending cuts.”

Over the longer term, investors are still afraid of the risk of default and European Central Bank President Jean-Claude Trichet hinted that the need to intervene by buying bonds is not that strong any longer, according to van Vliet.

“My guess is that they will have to continue buying bonds,” he said. “It all depends on whether the economy will start growing in Greece.”

The risk of default by one of the southern European countries was the main fear in the markets earlier this year, when ratings downgrades sparked massive selloffs in stocks as well as bonds and investors were taking refuge in US Treasurys, gold and cash.

“The process of credit downgrades reinforcing confidence erosion, I think that’s a bit over,” van Vliet said.

Default Risk Is Gone

Investors will slowly realize that the risk of default by European nations on their debt is gone, and they will push up stock prices and the euro, according to economist Warren Mosler, founder and principal of broker/dealer AVM.

In June, Mosler told CNBC.com the euro was likely to rise to between $1.50 and $1.60 because of the austerity measures in Europe.

He reaffirmed his stance, saying that there had been a “mad rush for the exits” by Europeans, who bought dollars and gold, pushing the euro down, when the default risk was high.

But the ECB’s decision to buy Greek bonds showed the bank was ready to spend money to defend countries in the euro zone and “there is no limit to what the ECB can spend,” Mosler told CNBC.com.

The ECB has put itself in a top position by doing this, as it can impose terms and conditions on any country that sells it its bonds, he explained.

“What that did is it shifted power from fiscal policy to the ECB,” Mosler said. “I would say they will not buy these bonds unless they can impose their terms and conditions.”

“It allows them to cut out one member selectively, without the whole system collapsing,” he said.

This latest announcement of the purchase of Irish bonds shows the ECB is continuing its policy of buying national govt bonds to facilitate solvency:

EU Headlines:
Europe’s bankers in talks over bail-out fund

Support for European spending cuts strong

European Bank’s Economist Is Optimistic on Sovereign Debt, but Critics Are Wary

EU Ministers Pressured to Give More Stress Test Data

ECB’s Bini Smaghi Favors Lower Deficit Limit for Stability Pact

ECB Buys 8 Billion Euros of Irish Bonds, Sunday Tribune Says

ECB Buys 8 Billion Euros of Irish Bonds, Sunday Tribune Says

July 11 (Bloomberg) — The European Central Bank bought about 8 billion euros ($10.1 billion) of Irish government bonds in the last seven weeks, the Sunday Tribune said, without saying where it got the information. The purchases account for as much as 10 percent of outstanding Irish bonds, the Dublin-based newspaper said.

The ECB has ‘written the check’ by buying national govt bonds in the secondary market in sufficient size to allow the national govs to fund themselves, and equities are coming back as solvency fears abate.

There is still solvency risk, but now that risk is the risk of the ECB cutting off any nation in question.

And with exports firming the same forces are causing the currency to strengthen to the point where net exports remain relatively stable.

The ECB is also in full control of the banking system liquidity, as it too is dependent on ECB funding, and dictates terms and conditions there as well, where there need be no failures (even a bank with negative capital can be sustained by liquidity provision) unless the ECB decides to let a bank fail.

EU Headlines:

ECB’s Trichet Says European Economy Showing ‘Encouraging’ Signs

Trichet dismisses fears over eurozone

Trichet Says European Capacity to Decide Always Underestimated

Trichet Says Bond Market Developments ‘Going in Right Direction’

Trichet Calls for ‘Appropriate’ Action on Stress Tests

Banks Will Need More Cash After Stress Tests

EU ‘Stress’ Tests Shrouded in Secrecy

EU Commission’s Barroso Says Bank Stress Tests Are ‘Credible’

ECB’s Bini Smaghi Says Greece Must Maintain Consolidation Effort

Bini Smaghi Says Market Rate Increase Won’t Affect Bank Loans

Stark Says ECB’s Monetary Analysis Enforces Discipline

Annual German Inflation Slows in June to 0.9 Per Cent

German Upper House Approves Naked Short-Selling Ban

French Manufacturing Rose in May, Lifted by Exports, Car Output

Italian Production Climbs as Weak Euro, Recovery Lifts Exports

Spain to allow cajas to sell 50% of equity

Greece Approves Austerity Plan Amid Outcry

Looks like my story is unfolding. OK Spanish auction as well. Assuming equity markets were down say 20% from the highs pricing in half the risk of default, they should adjust upward by most of that as default risk fades:

The European Central Bank bought €4bn ($5bn) in eurozone bonds last week, the same as in the previous two weeks, indicating it had fallen into a pattern of low-level intervention in sovereign debt markets, the FT reports.

Yes, I think we have a nice L shaped economy with modest GDP growth and modestly improving employment, so far mostly evidenced by the increased hours worked that you’ve been pointing out. Acceleration happens when/if some aspect of private sector credit growth takes off.

If euro solvency risks are indeed fading, it should be back to an ok market for stocks (which could have a large one time shift upwards to reflect the reduced euro risk), and low rates from the Fed until something changes.

Like Japan, the budget deficit may be large enough to keep it all from collapsing but not enough for the kind of growth that would trigger higher rates from the Fed.

Karim writes:

Data off recent peaks but still firmly in expansion territory:
Anecdotes mixed:

• “Component lead times are increasing sharply.” (Computer & Electronic Products)
• “Market had begun to change, but it is now declining again.” (Wood Products)
• “BP oil spill will impact business conditions over the next few months.” (Fabricated Metal Products)
• “The economy continues to be sluggish, with orders 8 percent to 10 percent below last year.” (Nonmetallic Mineral Products)
• “Retail sales are strong for both the domestic and international markets.” (Food, Beverage & Tobacco Products)

Q2 ended

ECB rolled it all over

Greece weathered the quarter end storm without going parabolic as in previous spikes, as ECB buying continues to provide the secondary market liquidity that enables dealers to buy the auctions.

Euro back up towards 1.24

This would be the time for equity markets to bottom and start discounting fading solvency risk

Might get a temporary pull back on tomorrow’s employment report but seems a weak economy is already fully discounted by US equities, probably also well beyond the actual weakness.

Euro Central Banks Step Up Bond Buying, Traders Say

By Paul Dobson

June 29 (Bloomberg) — Euro-region central banks stepped up purchases of Greek, Portuguese and Irish government securities today, traders said, deepening efforts to support the region’s bond market in the wake of the sovereign-debt crisis.

The purchases focused on maturities of five years and below, with some buying interest also shown for longer-maturity Greek bonds, said the traders, who declined to be identified because the transactions are confidential. The extra yield, or spread, investors demand to hold the nations’ securities instead of benchmark German debt narrowed.

The European Central Bank took the unprecedented decision to start buying government bonds last month to help the European Union contain the Greek debt crisis. The ECB said yesterday it bought 4 billion euros ($5 billion) of bonds last week, taking the total purchases as of June 25 to 55 billion euros. Greek debt spreads had been widening, approaching their levels before the EU rescue was announced in early May, amid speculation funds that track bond indexes were selling the debt.

Central banks “are more active than they have been of late,” said Huw Worthington, a fixed-income strategist at Barclays Capital in London. “There has been a lot of volatility in a lot of the spreads, and some concerns of selling ahead of the month end.”

Greek two-year notes rose, sending the yield down 41 basis points to 10.19 percent as of 3:43 p.m. in London. The yield spread with German two-year notes fell 39 basis points to 1001 basis points. The yield on 10-year Greek bonds fell 41 basis points to 10.57 percent.

Greek securities will leave indexes managed by Citigroup Inc., Barclays Plc and the Markit iBoxx index at the end of this month after they were downgraded to junk by Moody’s Investors Service, potentially triggering sales by managers in so-called passive funds.

The Irish two-year bond yield fell 11 basis points to 2.88 percent and equivalent-maturity Portuguese yields dropped nine basis points to 3.61 percent.

ECB purchases of govt bonds for last week amounted to EUR 4 billion,
matching previous week and bringing total to EUR 55 billion:

Week     Purchases    Total
1           16.5            16.5
2           10.0            26.5
3           8.5              35.0
4           5.5              40.5
5           6.5              47.0
6           4.0              51.0
7           4.0              55.0

That’s a lot of greek bonds, presumably the ECB is buying enough to support rates sufficiently so they can refi themselves.

Still looks like the strategy for Europe could be functionally very close to my proposal, and fiscally sustainable if they continue on the current path.

This is just inference on my part- I have no information other than what I’ve read online.

The ‘distributions’ the ECB will make will be via buying enough national govt debt in the secondary markets to keep the national govs solvent and able to fund their deficits, at least in the short term markets.

If they determine any member nation is not complying to their liking, they will start threatening to stop buying their debt, thereby isolating them from the ECB credit umbrella, while allowing the remaining nations to remain solvent.

ECB spending on anything is not (operationally) revenue constrained as the member nations are, so this policy is nominally sustainable.

The austerity measures will result in lower growth, and maybe even negative growth, but the solvency issue is gone as long as this policy is followed.

With currency strength and inflation ultimately a function of fiscal balance, the fundamental forces in place that drove the euro to 1.60 vs the dollar remain in place, while the mechanism to remove the default risk that drove the portfolio shifts that weakened the euro is in place.

While restructuring risk remains, it need not be forced by solvency risk. So restructuring need not happen.

Power has shifted to the ECB, presumably under substantial influence of the national govt finance ministers, as the ECB directly or indirectly moves to fund the entire banking system and national govt. deficits.

This is an institutional structure that is fully sustainable financially, with the economic outcome a function the size of the national govt. deficits they allow.

The conflict will remain the money interests in Europe who put currency strength as a priority, vs the exporters who favor currency weakness.

The consensus will be that unions and wages in general must be controlled.

Again, I do not know for sure that the ECB is actually moving in this direction.
They may not be.

Watch closely to see if the buying of national govt. securities remains sufficient to keep the national govts solvent.

(Feel free to distribute)

HEADLINES:

Europe Rebound Stalls in June on Market Strains, Eurocoin Shows
Barroso Says European Leaders Want to Keep Euro ‘Very Strong’
Schaeuble Says Europe Will Meet Deficit Targets, Corriere Says
Merkel faces test in vote for president
Berlin hints at move on pay deal ruling
Germany Trims 3rd-Quarter Debt Sales, Plans Bigger Cuts in 4th
Germany Faces Shortage of Skilled Workers in 2025, Study Says
French Economy Slowed to a Crawl in First Quarter of 2010
French Jobless Claims Increase as Companies Trim Workforces
Lagarde Says Pension Reform Is Priority, Sees AAA Rating Safe
Confindustria Raises Italian GDP Growth Forecast on Euro Drop
Spanish May Producer Prices Advance Most in 19 Months on Oil
Spain May Cut 426-Euro Unemployment Subsidy, Cinco Dias Reports
Greek optimistic on budget deficit reduction

ARTICLES:

Europe Rebound Stalls in June on Market Strains, Eurocoin Shows

(Bloomberg) The euro-area economic recovery stalled in June for a third month amid financial-market “strains.” The Eurocoin index measuring economic expansion in the 16 nations that share the single currency fell to 0.46 percent from 0.55 percent in May, the Center for Economic Policy Research and the Bank of Italy, which co-produce the index, said in a statement. “Recent strains in the financial markets have affected the performance of the indicator,” according to the statement. The index “has however been supported by the new improvement in foreign trade.” The index, which includes business and consumer confidence readings, industrial production, price figures and stock-market performance, aims to provide a real-time estimate of economic growth, according to the report.

Barroso Says European Leaders Want to Keep Euro ‘Very Strong’

June 25 (Bloomberg) — European Commission President Jose Barroso said the region’s leaders are determined to keep the euro a “very strong” currency.

“I have no doubts of the absolute determination of European Union leaders and European Union institutions to keep the euro as a very strong and stable currency,” Barroso said in an interview with Bloomberg Television in Toronto, where he is attending a meeting of leaders from Group of 20 countries.

Against the U.S. dollar, the euro has fallen 19 percent since its Nov. 25 high, trading yesterday at $1.2279 after reaching a four-year low of $1.1877 on June 7.

The 16-nation currency’s “real effective exchange rate has lost close to 10 percent” since its peak in October, the European Commission, the EU executive, said yesterday in its quarterly assessment of the euro-region economy.

The continent’s economic “fundamentals” are good, and Europe’s debt and deficits are smaller than some of its “main partners,” Barroso said, adding investors have been reassured by an almost $1 trillion plan by the euro nations and the International Monetary Fund to backstop the sovereign debt of the region’s weakest members.

It’s “a very important message of confidence that is being conveyed to markets as well,” Barroso said.

Barroso also said that China’s plan to provide more currency flexibility was a “move in the right direction” that increases confidence in the global economy.

Earlier yesterday, Barroso said that exit strategies from fiscal stimulus programs should be gradual, differentiated and “growth-friendly.”

Schaeuble Says Europe Will Meet Deficit Targets, Corriere Says

June 25 (Bloomberg) — German Finance Minister Wolfgang Schaeuble said he has “no doubt” that European governments will hold to their commitments to cut public deficits, Corriere della Sera reported, citing an interview.

“Too-high deficits have to be responsibly reduced,”

Corriere quoted Schaeuble as saying. “We have a shared agreement, and I have no doubt that all will abide by their commitments.”

Merkel faces test in vote for president

(FT) The presidential election – in a specially constituted federal assembly – represents the biggest challenge for Angela Merkel since she formed a government in October combining her own Christian Democratic Union with the liberal Free Democratic party. The combined popularity of the coalition parties has since dropped from 48.4 per cent to 35 per cent, according to a poll published by Stern magazine and the RTL television network. The proportion of voters saying they would vote again for Ms Merkel as chancellor has also dropped to just 39 per cent, her lowest rating for more than three years, according to a Forsa institute poll. Political scientists believe that if Christian Wulff, Ms Merkel’s candidate for the presidency, were to lose the vote on Wednesday to Joachim Gauck, the non-party candidate supported by the SPD and Greens, it could force the resignation of both the chancellor and her government.

Berlin hints at move on pay deal ruling

(FT) The German government on Thursday signalled it was considering legislation to quell protests from both company chiefs and worker representatives over a court ruling that threatens the way they agree wage deals. Judges in Erfurt, eastern Germany, on Wednesday ended a 50-year-old practice of extending in-house wage deals made between an employer and its biggest union to cover all workers in the company doing similar jobs. The judges agreed with a doctor at a hospital in Mannheim who had demanded he be paid according to the national pay deal of the doctors’ union, not the in-house deal agreed by services union Verdi. They said in their verdict that established wage-bargaining practices contravened the right of citizens freely to form alliances. There was no “basic principle” forcing a company “to adopt a uniform wage deal”, they declared.

Germany Trims 3rd-Quarter Debt Sales, Plans Bigger Cuts in 4th

(Bloomberg) Germany will sell 77 billion euros ($94.5 billion) of bonds and bills in the third quarter, 2 billion euros less than forecast in December. A larger adjustment will come in the fourth quarter, assuming the economy stays steady, a finance ministry official said. Finance Minister Wolfgang Schaeuble has pledged to cut net new borrowing by the end of the year. A federal issuance calendar released in December said gross debt sales this year would be a record 343 billion euros ($421.5 billion). The third-quarter debt issuance includes 44 billion euros of bonds and 33 billion euros of bills. Schauble’s ministry said on June 22 that the so-called structural budget deficit will be 53.2 billion euros this year, 13.4 billion euros less than the 66.6 billion euros originally expected. It also said then that net new borrowing this year will be 15 billion euros below the 80.2 billion euros in the 2010 budget plan.

Germany Faces Shortage of Skilled Workers in 2025, Study Says

June 25 (Bloomberg) — Germany faces a shortage of skilled workers in 2025 as the population is shrinking, the Federal Labor Agency’s research institute said.

Due to demographic reasons the size of the German workforce will constantly decrease until 2025 while the number of employed in the services industry may rise by more than 1.5 million, the institute said in a study published yesterday.

By contrast, the number of employees in the manufacturing industry may fall by almost 1 million over the next 15 years, the study said.

German unemployment fell more than twice as much as economists forecast in May as exports from Europe’s biggest economy surged, bolstering the recovery. The number of people out of work declined a seasonally adjusted 45,000 to 3.25 million, the lowest since December 2008, the Labor Agency said June 1.

French Economy Slowed to a Crawl in First Quarter of 2010

Paris (dpa) — The French economy slowed alarmingly in the first quarter of 2010, with gross domestic product (GDP) expanding by only 0.1 per cent, the government’s statistics office Insee said Friday.

The primary reason for the poor result was a drop of 0.2 per cent in domestic demand, compared to an increase of 0.5 per cent in the last quarter of 2009, when GDP rose by 0.6 per cent.

This was the second bit of bad economic news for the government in less than 24 hours. Late Thursday, the Labour Ministry said that the rolls of unemployed had grown by some 22,600 in May, the largest rise in unemployment since the beginning of the year.

Some 2.7 million people were out of work at the end of May, an unemployment rate of 9.5 per cent.

French Jobless Claims Increase as Companies Trim Workforces

(Bloomberg) The number of jobseekers in France climbed in May as manufacturers trimmed payrolls in the wake of the country’s worst recession in more than half a century. The number of unemployed actively looking for work rose by 22,600 last month, an increase of 0.8 percent, the Labor and Finance Ministries said. The total number of jobseekers was 2.7 million. While claims have risen every month this year except in March, national statistics office Insee predicts the economy is about to begin creating jobs again for the first time in two years. “Total employment fell heavily in 2009, dragged down by the drop in activity,” Insee said late yesterday. “It should progress slightly over 2010 as a whole.”

Lagarde Says Pension Reform Is Priority, Sees AAA Rating Safe

June 25 (Bloomberg) — France’s plan to lift its retirement age is a signal to investors about the seriousness of President Nicolas Sarkozy’s intention to cut the budget deficit, Finance Minister Christine Lagarde said.

“The priority is to protect the retirement system,”

Lagarde said today on France Inter radio. “We are also trying to send a message of security to the markets.”

Sarkozy’s government set out proposals last week to raise the minimum age at which workers can tap the state pension to 62 in 2018 from 60 currently. The age at which full benefits are reaped is to rise to 67 from 65 under the plan, which labor unions protested yesterday.

France is the only country among Europe’s five biggest economies not to have presented a detailed savings plan for next year. Britain set out deficit-cutting measures totaling 113 billion pounds ($167 billion) earlier this week and Germany announced cuts of 81.6 billion euros ($101 billion) on June 7.

Sarkozy has committed to reducing the deficit from 8 percent of gross domestic product this year to 6 percent in 2011 and 3 percent in 2013.

Lagarde said “there’s no reason to think” that France’s AAA credit rating is threatened, though she said the country doesn’t have the luxury of time to debate the pension overhaul.

“We have time pressure, it’s not possible to delay,”

Lagarde said. “The public finance situation doesn’t allow for it. We need to take measures quickly.”

Sarkozy and Lagarde join leaders and finance ministers of the Group of Eight later today in Huntsville, Ontario, before meeting their Group of 20 counterparts tomorrow in Toronto.

Confindustria Raises Italian GDP Growth Forecast on Euro Drop

(Bloomberg) Italian gross domestic product will expand 1.2 percent this year and 1.6 percent in 2010, up from previous forecasts of 1.1 percent and 1.3 percent respectively, Confindustria said. The single currency’s 14 percent slide against the dollar this year will “more than offset” the impact of budget cuts worth 24.9 billion euros, which will shave 0.4 percentage points of GDP in 2011 and 2012, Confindustria said. Prime Minister Silvio Berlusconi’s deficit-curbing measures aim to reduce the budget deficit by an additional 1.6 percent of GDP, bringing the shortfall within the EU limit of 3 percent of GDP in 2012 from 5.3 percent last year.

Spanish May Producer Prices Advance Most in 19 Months on Oil

June 25 (Bloomberg) — Spanish producer-price inflation accelerated to the fastest in 19 months in May as higher oil prices boosted energy costs.

Prices of goods leaving Spain’s factories, mines and refineries rose 3.8 percent from a year earlier after a 3.7 percent increase in April, the National Statistics Institute in Madrid said today. That’s the biggest increase since October 2008. From the previous month, prices gained 0.2 percent.

Crude-oil prices rose 8 percent in the 12 months to the end of May, pushing up manufacturers’ costs. Still, with the economy continuing to shrink and the unemployment rate at 20 percent, consumer-price inflation remains restrained. Spain’s underlying inflation rate, which excludes volatile food and energy prices, turned negative in April for the first time on record.

The government forecasts the economy will contract 0.3 percent this year.

Spain May Cut 426-Euro Unemployment Subsidy, Cinco Dias Reports

June 25 (Bloomberg) — Spain’s Labor Minister Celestino Corbacho may cut a 426 euro-a-month ($525) subsidy paid to the unemployed whose two-year, contributions-based jobless benefit has run out, Cinco Dias reported.

The subsidy, which cost the state 1.2 billion euros since it was introduced last year, will be difficult to maintain after August as Spain tries to cut its deficit, the newspaper reported, citing an interview with Corbacho.

Greek optimistic on budget deficit reduction

(AP) Greece’s finance minister on Thursday voiced confidence that the country will meet or even surpass its ambitious targets to slash spending and boost revenues by the end of the year. “Have we won the bet? No,” George Papaconstantinou said. “But we have well-founded hopes and are optimistic that, for the first time in many years, at the end of the year the state budget will achieve or even exceed the targets we have set.” Papaconstantinou said his optimism was based on figures showing a 40 percent deficit reduction during the first five months of the year, as well an expected revenue boost from increased consumer taxes. On Friday the cabinet is set to approve a key draft law on pension and labor reforms. The government says the current pension system is not viable, and if left unchanged would come to absorb 24 percent of GDP in 2050, from the current 12 percent.

On Thu, Jun 24, 2010 at 7:37 AM, wrote:

you seem to be arguing that the fix is in for the eurozone. is that a correct read?

Yes, looks like it to me.

if so, then your expected rise in the euro could occur sooner rather than later.

Yes.

seems to me that it will be difficult for the euro to rally anytime soon as central banks / portfolio managers trim their euro exposure on any strength.

Right, the portfolio shifting may not have run its course yet. That’s the risk. I’m thinking a sell off in gold, which went up this last bit due to euro fears, will signal the turn in psychology/reduction in euro fear.

With restructuring risk already on the table, seems it has to be mainly discounted in that anyone who can readily shift out of euro already have, and for those still holding euro financial assets they probably have euro liabilities and don’t want to add currency risk by shifting out of euro?

I suppose the real test will be the next mini funding crisis to see how the euro handles that stress.

Makes sense.

i’m getting fixated on the whole monetarists vs keynesian showdown that seems to be unfolding. in my mind the Greenspan era conditioned traders to believe that monetary policy was all powerful and the solution to every bump in the road. with rates near zero almost everywhere that impression will certainly fade.

And rightly so. The reality is sinking in that the Fed has no more meaningful tools, and the ones they thought they had can only help liquidity, and not support aggregate demand beyond keeping it from getting worse due to liquidity issues.

at the same time, the magnitude of the financial crisis and now the Greek crisis has seriously damaged the credibility of deficit spending.

Yes, for the wrong reasons, but I agree that’s the perception that’s driving policy.

so here we are with little faith in either concept and no clear sign anywhere of the handoff from public sector to private sector demand growth.

Right, that hand off traditionally comes from a return of private sector credit expansion, mainly housing and cars, which still hasn’t taken hold in this cycle. With all the demand leakages of unspent income due to pension funds, corp reserves, etc, some entity has to spend more than its income to make up for that.

I see a big test of theory coming in the next few years with little ammunition to proactively fight.

interesting times for sure.

Depressing, too.

I’d like to live during at least one period of true prosperity that’s ours for the taking in this time of abundant resources and geometrically expanding technology.

As previously discussed, it is possible their deficits already got high enough and the euro low enough to support very modest growth when market forces intervened to stop further fiscal expansion.

One problem now is proactive cuts can set them back if a combination of private sector credit and exports doesn’t expand at the same time.

And expanding exports remains problematic as that would tend to strengthen the currency to the point where net exports remain relatively low, and there is nothing they can do to keep the euro down should that happen.

Another problem is the market forces that are working to limit their fiscal expansion will continue to hamper their ability to fund themselves, especially with continuing talk of ‘restructuring’ which, functionally, is a form of default.

I’ve read the ECB is now buying about 10 billion euro/week of national govt bonds in the secondary markets and ‘learning and demonstrating’ that it is not inflationary, doesn’t cause a currency collapse, and poses no operational risk to the ECB as some feared it might. As they all become ‘comfortable’ with this look for market forces to ‘force’ them to expand the buying geometrically as happened with their funding of their banking system, where much of the ‘risk’ is now at the ECB as they accept collateral for funding from their member banks that no one else will.

Operationally the ECB can fund the whole shooting match. And if they can address the moral hazard the usual way via the growth and stability pact, this time with the leverage of being able to threaten to cut off ECB funding to punish non compliance.

This ’solution’ of the ECB buying national govt debt in the secondary markets is conceptually/functionally nearly identical to my proposal of per capita distributions to the national govts by the ECB. The difference is my proposal would not have ‘rewarded bad behavior’ as theirs does, but that’s a relatively minor consideration for them at the moment, and if they continue doing what they are doing, they have ’saved the euro,’ even though having the ECB fund all the banks and national govts wasn’t their original idea of how it all would end up.

European Industrial Orders Increase for Third Month

Trichet Says Current Situation Requires ‘Credible Measures’

ECB’s Trichet Says Italian Budget Cuts Go in ‘Right Direction’

German debt agency asked to issue bonds

Schäuble defends German austerity

German Government Won’t Turn to Tax Cuts Amid Deficit Reduction

S&P’s Kraemer Sees No ‘Serious Risk’ of Euro Break Up

Merkel Defends Spending Cuts, Gets Backing From Trichet

Germany Sees Jobless Numbers at Under 3 Million

French Consumer Spending Gains on Signs Job Market Is Improving

French Economy to Expand 1.4% This Year on Exports, Insee Says

Zapatero Says Not Cutting Deficit Would Raise Interest Costs

We still contend that the world’s economic analysts do not understand the problem with the EMU mechanism, namely that there is no central fiscal authority that is allowed to credit accounts in an unlimited fashion. If you have doubts, please read the article below.

I mentioned when Estonia announced entry three weeks ago that if any sovereign really understood that they were giving up true ability to simply supply all the credits necessary in local currency, versus now having to tax or borrow before you spend (like municipalities), Estonia would not enter.

And please read the underlined portion of the article below. They still position the Euro mechanism weakness as “no policy fits all” or “there is no authority to distribute EU wide tax revenues collected”, or “there is no political union”. It all misses the point.

The U.S., Canada, Japan, Australia and UK do not borrow money. They drain excess reserves by issuing government securities so we can earn interest. Remember, when Japan allowed 30trn of excess reserves by not issuing government securities, the bill auctions were 200 times oversubscribed, even though the bills yielded only 2 or 3bps.

The mechanism is not fixed, the governments have limited resources for obligations, unless they allow the ECB or some other fiscal authority to have unlimited ability to credit accounts.

Thanks, Cliff

Agreed.

They also seem to equate a strong euro with economic prosperity.

What Crisis? The Euro Zone Adds Estonia

June 18 (NYT) —Guess what? The funniest thing happened in Europe on Thursday. A new country joined (yes, joined) the euro zone. And the mood here was upbeat.

With a debt crisis that appears to be spreading from Greece to Spain, membership for the country, Estonia, might seem more curse than blessing. There had been speculation that countries might abandon the single currency. And some doubt Estonia is even ready for the move.

“Maintaining low inflation rates in Estonia will be very challenging,” the European Central Bank warned last month.

Still, the euro remains among the strongest currencies in the world, and membership opens the door to a club with global influence. For small and unsure countries on the fringes of the European Union, it doesn’t get much better — no matter the mounting downsides for countries already on the inside.

“Joining the euro is a status issue for countries seeking to cement their position at Europe’s top table,” said Simon Tilford, the chief economist for the Center for European Reform, a research organization based in London. “But you also could call it sheer bloody-mindedness of Estonia to join now with the outlook for the currency so uncertain.”

Meeting in Brussels, Europe’s 27 governments hailed the “sound economic and financial policies” that had been achieved by Estonia in recent years. They said Estonia would shift from the kroon to the euro on Jan. 1, 2011.

For the leaders of the bloc, expanding the euro zone to 17 nations is tantamount to a show of confidence at an inauspicious time for the battered euro, which has lost about 13 percent of its value against the dollar since the beginning of the year.

“The door to euro membership is not closed because we are going through a sovereign debt crisis,” said Amadeu Altafaj, a spokesman for Olli Rehn, Europe’s commissioner for economic and monetary affairs. “Estonia’s admission is a sign to other countries that our aim is to continue enlarging economic and monetary union through the euro.”

With economic output of about $17 billion, the Estonian economy is tiny. Yet the country’s central bank governor, Andres Lipstok, will now be able to take a seat on the European Central Bank’s powerful council that sets interest rates.

Membership is also an important signpost that a country is on the way to achieving Western European standards of living, an important goal for a former Soviet republic like Estonia that has long been among the Baltic states eager to develop.

Perhaps most important, membership is recognition of the hard work and sacrifice it took to keep Estonia’s bid on track.

Estonia, along with Sweden, were the two countries with the smallest shortfalls between revenue and spending among all members of the 27-member European Union. Moreover, public debt in Estonia at 7.2 percent of gross domestic product is tiny compared with that of most other countries in the bloc.

“It’s a great day for Estonia,” Andrus Ansip, the Estonian prime minister, told Latvian state radio in an interview here.

“We prefer to be inside, to join the club, to be among decision makers.”

Estonia becomes the third ex-Communist state to make the switch to the euro, after Slovenia and Slovakia, but it is the first former Soviet republic to do so, sending a signal to other countries in Central and Eastern Europe that they, too, can aspire to membership.

That said, the euro zone is not expected to expand further for some time to come as other candidates like the Czech Republic, Hungary, Latvia, Lithuania, Bulgaria, Romania and Poland still fall short of the entry criteria partly because of their large budget deficits.

And the accession of Estonia will do little to erase the chief criticism of the euro project: that Europe’s nations are too economically disparate to maintain supranational institutions like a single currency in the long term.

Price stability is one of the main criteria for admission to the euro club. But in the past, political leaders have brushed off concerns from the European Central Bank about candidate nations in their eagerness to expand the euro zone.

Greece won admission even after the central bank reported in 2000 that the country’s debt equaled 104 percent of gross domestic product, far above the limit of 60 percent set out in the Maastricht Treaty. The bank said that Greek inflation met targets only because of declines in oil prices and other exceptional factors.

According to economists, the preparation to join the euro zone created some disadvantages for Estonia compared with neighboring countries, which have enjoyed a relative degree of flexibility by hanging on longer to their legacy currencies for now.

Now that Estonia is joining the euro zone, the most immediate advantages are likely to include greater interest from foreign investors and lower borrowing costs for both the public and private sectors.

But those could be short-term advantages. Estonia and its export-driven economy could be quickly overshadowed by financial difficulties, particularly if the euro zone remains unstable and if neighboring countries like Poland and its Baltic neighbors insist on hanging on to their currencies.

“Investors will only be willing to lend to Estonia on favorable terms if Estonia can continue to compete,” said Mr.

Tilford, the London economist. “That is where the biggest risks for Estonia now lie.”

And there is another downside, Mr. Ansip, the Estonian prime minister, said in the radio interview.

“Our banknotes are more beautiful than euro banknotes,” he said.

Thanks,

It was an hour interview and to some degree taken out of context.

I would not buy euro here- chart looks terrible!!!

But I would look to see it show signs of turning with an eye to getting long, probably vs the yen.

The problem with the euro zone has been a tendency for the currency to continually adjust to levels where the trade balance can’t go into surplus in a meaningful way, like China, Japan, and Germany before the euro.

To run a trade surplus generally requires tight fiscal to keep domestic demand down, but then a policy of buying fx (off balance sheet deficit spending) to keep the currency ‘competitive’ to support exporters at the expense of the macro economy.

Euro May Rise to $1.60 Due to Austerity: Economist

By Antonia Oprita

June 4 (CNBC) — Austerity measures imposed by the euro zone will likely push the euro back towards $1.50 or even $1.60 but the European currency is unlikely to achieve the status of reserve currency, economist Warren Mosler, founder and principal of broker/dealer AVM, told CNBC.com Friday.

The euro has fallen sharply versus the dollar since the euro zone’s sovereign debt worries began, with many analysts predicting it will slide to parity with the greenback or even below.

But Mosler thinks the recent plunge has been caused by portfolio adjustments – investors shifting assets from euros to gold or dollars – and that this trend is nearly over.

Rising taxes and spending cuts, pledged by governments in the single European currency area to cut debt, are “like a crop failure” because they will decrease the amount of euros available, he said.

“Everything they do in the euro zone is highly deflationary,” Mosler told CNBC.com in a telephone interview.

“I think there’s a very good chance the euro would be stronger because of the austerity measures; this can very easily get it back to $1.50-$1.60,” he added.

To keep the euro down, the ECB would have to buy dollars but “ideologically, that would mean they’re accumulating dollar reserves,” which the European Union does not want, Mosler said.

The euro is unlikely to become a global reserve currency because the EU’s economic policy is geared towards growth based on exports and the euro zone is running a surplus, he explained.

“The only way the rest of the world will hold your currency is if you run a trade deficit,” he said. “Economics is the opposite of religion, it’s better to receive than to give.”

The ECB Could End the Debt Crisis

The European Central Bank could easily appease the fears of default which have plagued markets regarding by creating money and giving it to its members, Mosler said.

The ECB, “if it wants to credit any nation, it can,” he added. “The ECB could make a distribution of, say, 10 percent of GDP to each member. The ECB can just credit the accounts of the member nations based on how many people they have. That would reduce all debt ratios this year by 10 percent.”

The measure would not contradict EU anti-bailout rules, since the money would be distributed equally among members and if the cash is used to cover the deficit would not be inflationary, Mosler added.

“My proposal is to put the ECB in a position where governments become dependent of checks from the ECB,” he said. “Operationally, it’s very simple to do, you just credit their accounts. The Finance Ministers would direct the money.”

The central bank could make this an annual distribution, and attach financial discipline conditions to it, such as respecting the EU’s Stability and Growth Pact.

The country that does not respect the pact does not get the money, making it a more powerful enforcement mechanism and helping fight speculators at the same time, he explained.

Pretty much all bad:

European Unemployment Unexpectedly Increases to 12-Year High

Trichet Says Fiscal Sustainability Fosters Confidence, Growth

By that he means the austerity measures/deficit cutting which only makes things worse.

Trichet Says ECB ‘Fiercely Independent,’ Stable Prices Mandate

Just doing his job.

Trichet sees need for ‘budgetary federation’

He’s sees this as a watchdog to keep deficits down.

Trichet Says ECB Won’t Tolerate Budget Indiscipline Any Longer

He’s concerned about the secondary mkt purchases of greek debt meaning even this very modest support is in question.

ECB’s Noyer Says Rating Firms Aggravating Crisis

Weber Says ECB Bond Purchases Musn’t Exceed ‘Tight Limits’

More talk on limiting ECB purchases.

ECB’s Stark Says Bank May Start Withdrawing Liquidity in July

Doesn’t matter but indicates their attitude.

Nowotny Sees No Risk of Double-Dip Recession due to Austerity

That’s the entire source of the risk of a double dip recession.

Bank of Italy: EU euro defense package can’t last

And calls for a return to the 3% deficit limits.

ECB: Banks Will Suffer Considerable Loan Losses In 2010, 2011

Bank deposits are insured only by the national govts that are already seeing their funding threatened.

ECB warns of ‘hazardous contagion’

True, but they have their channels totally confused.

Trichet Says Second-Quarter Growth May Be Better Than Expected

European Manufacturing Growth Slowed More Than Estimated in May

Germans, ECB Spar Over Bond Plan

After Debt Crisis, New Tension Between ECB, Germany

Survey suggests Germans are unhappy with Merkel

Merkel Says Budget Deficit Looks ‘Moderate’ Versus Spain, U.K.

Still doesn’t get how the UK comp isn’t applicable.

Hypo Real Estate gets more loan guarantees

Spain presses for labor market reform deal

Fitch downgrades Spain’s credit rating

European Loans Post First Annual Increase in Eight Months

German Unemployment Falls Twice as Much as Forecast

German Retail Sales Rose in April on Declining Unemployment

French New Car Sales Fall 12% in May, After 12 Monthly Gains

Italian Unemployment Climbs as Recovery Fails to Create Jobs

This video has the initial segment of my presentation at the April 28th fiscal sustainability conference, followed by an interview that I was told aired in Russia. It includes my euro zone proposals and proposals for the US Economy.

Euro Swings Won’t Stop China Reserves Shift, Yu Says

Right, they want to stay ‘competitive’ in the euro zone

China Property Stocks to Rebound End-Year, Xia Says
China’s Inflation Target of 3% This year ‘Difficult’ to Meet

Even with the yen rising with the dollar.
Not a good sign.
Inflation per se isn’t ‘bad’ for an economy, it’s that people don’t like inflation and fighting inflation can be very bad for an economy.