The US economy seems to be muddling through at modestly positive GDP growth, supported by a still sort of high enough 8% or so govt fiscal deficit.

The year and fiscal cliff is a looming disaster but it’s too soon for markets to discount a high chance of it actually happening.

Lower oil prices are helping the US consumer and the $US.

The stronger $US works against US exports some and earnings translations a bit as well. Weaker global demand also works against US exports.

Deficit spending in the euro zone has also been rising some, and after the latest rounds of austerity and subsequent deficit increasing weakness may total something close to 7% of GDP.

That should be enough to muddle through as well. Austerity hikes unemployment and deficits to the point where the resulting deficit is sufficient to sustain things. Without another round of austerity there should be some sort of stability of output and employment.

That is, while it’s doubtful the ‘new europe’ will engage in meaningful fiscal expansion, it may not proactively raise taxes and/or cut spending in any meaningful way, either.

So as the member nations stumble their way through each successive securities auction, it won’t surprise me if their economies sort of stabilize around 0 growth or so. And then begin to pick up a tiny bit. All supported by the current, higher levels of deficit spending.

And the lower euro could help their exports some as well.

Yes, there will be all kinds of credit related vol, but under it all there will be sales and profits taking place. The businesses that are still around are the survivors who know how to get by in this kind of economy, where, while slower than it ought to be, there is still about $40 trillion worth of goods and services getting bought/sold in the US and Europe. GDP growth has gone to near 0, but not GDP itself.

Venice video link here.

Also, Trichet Friday, the German elections, and G8 reports seem to be setting the tone for the euro zone to do something about the solvency issue. This is very good for equities and the rest of the credit stack.

At the same time it does not seem likely that any growth proposals will include fiscal relaxation, so the euro zone will have to get by the best it can with the deficits it has, which I’d guess should mean flat GDP, +/- 1% or so.

The US should also continue to muddle through with modest top line growth, and inflation low enough and the output gap wide enough to keep this Fed from hiking any time soon.

Not much of a plan, but note that it now makes ECB centric proposals respectable.

This is serious progress:

Ex-ECB Chief Trichet Unveils Bold Plan to Save Euro

May 17 (Reuters) — Europe could strengthen its monetary union by giving European politicians the power to declare a sovereign state bankrupt and take over its fiscal policy, the former head of the European Central Bank said on Thursday in unveiling a bold proposal to salvage the euro.

The plan offered by Jean-Claude Trichet, who stepped down last November as ECB president, would address a fundamental weakness of the 13-year-old single currency, the survival of which is threatened by the Greek crisis.

The monetary union has always defied economic principles, because the euro was launched ahead of European fiscal or political union. This has caused strains for countries running huge budget deficits – namely Greece, Portugal, Ireland, Spain and Italy – that have led to financing difficulties and over-stretched banking systems.

For the European Union, a fully fledged United States of Europe where nation states cede a large chunk of fiscal authority to the federal government appears politically unpalatable, Trichet said.

An alternative is to activate the EU federal powers only in exceptional circumstances when a country’s budgetary policies threaten the broader monetary union, he said.

“Federation by exception seems to me not only necessary to make sure we have a solid Economic and Monetary Union, but it might also fit with the very nature of Europe in the long run. I don’t think we will have a big (centralized) EU budget,” Trichet said in a speech before the Peterson Institute of International Economics here.

“It is a quantum leap of governance, which I trust is necessary for the next step of European integration,” he said.

His proposal was presented in Washington on the eve of the G8 meeting of the world’s major economies, hosted by U.S. President Barack Obama who will press Europe to intensify its efforts to resolve the sovereign debt crisis, which threatens a fragile global recovery.

It also comes ahead of a critical meeting of EU leaders on May 23 to discuss ways to support growth. Its strict budgetary policies to date have led to recessions in many countries, political unrest and in Greece a political stalemate after recent elections.

Trichet said the building blocks already are in place for moving ahead with his fiscal plan.

Countries have agreed to surveillance of each other’s budgets and they have agreed to levy fines on countries that run excessive budget deficits, giving them fiscal oversight authority.

The next step would be to take a country into receivership when its political leaders or its parliament cannot implement sound budgetary policies approved by the EU. The action would have democratic accountability if it were approved by the European Council of EU heads of states and the elected European Parliament, he said.

The idea earned a warm reception from leading economists and prominent Europeans attending the session.

“It is a very radical proposal, couched as a modest step,” said Richard Cooper, international economist at Harvard.

Caio Koch Weser, former German economics minister, said he found it “very attractive” because it addresses the problem of a strong European Central Bank, a weak European Commission which acts as the EU’s executive branch, and a confused European Council, which provides political leadership.

US economy muddling through, growing modestly, particularly given the output gap, but growing nonetheless.

Lower crude prices should also help some.

I had guessed the Saudis would hold prices at the $120 Brent level, given their output of just over 10 million bpd showed strong demand
and their capacity to increase to their stated 12.5 million bpd capacity remains suspect. And so with the Seaway pipeline now open (last I heard)
to take crude from Cushing to Brent priced markets I’d guessed WTI would trade up to Brent.

But what has happened is the Saudi oil minister started making noises about lower prices and when ‘market prices’ started selling off the Saudis ‘followed’ by lowering their posted prices, sustaining the myth that they are ‘price takers’ when in reality they are price setters.

So to date, contrary to my prior guess, both wti and brent have sold off quite a bit, and cheaper imported crude is a plus for the US economy. Which is also a plus for the $US, as a lower import bill makes $US ‘harder to get’ for foreigners.

But the trade for quite a while has been strong dollar = weak US stocks due to export pricing/foreign earnings translations, and also because US stocks have weakened on signs of euro zone stress, which has been associated with a weaker euro. So when things seem to be looking up for the euro zone, the euro tends to go up vs the dollar, with US stocks doing better with any sign of ‘improvement’ in the euro zone.

It’s all a tangled case of cross currents, which makes forecasting anything particularly difficult.

Not to mention possible dislocations from the whale, which may or may not have run their course, etc.

And then there’s the news from Greece.

First, they made a full bond payment yesterday of nearly 500 million euro to bond holders who did not accept the PSI discounts. This is confounding for the obvious reasons, signals it sends, moral hazard, credibility, etc. etc. But it’s also a sign the politicians are doing what they think it takes to keep the euro going as the currency of the euro zone. Same goes for the decision to fund Greece as per prior agreements even when there is no Greek govt to talk to, and lots of signs any new govt may not honor the arrangements.

Even if that means tricking private investors out of 100 billion, rewarding those who defy them, whatever. Tactics may be continuously reaching new lows but all for the end of keeping the euro as the single currency.

It also means that while, for example, 10 year Spanish yields may go up or down, the intention is for Spain, one way or another, to fund itself, even if short term. Doesn’t matter.

And more EFSF type discussions. The plan may be to start using those types of funds as needed, keeping the ECB out of it for that much longer, regardless of where longer term bonds happen to trade.

As for the euro zone economy, yes, growth is probably negative, but if they hold off on further fiscal adjustments, the 6%+ deficit they currently are running for the region is probably, at this point, enough to muddle through around the 0 growth neighborhood. The upside isn’t much from there, as with limited private sector credit growth opportunities, and substantial net export growth unlikely, and strong ‘automatic stabilizers’ any growth could be limited by those automatic fiscal stabilizers. Not to mention that this type of optimistic scenario likely strengthens the euro and keeps a lid on net exports as well.

And sad that this ‘bullish scenario’ for the euro zone means their massive output gap doesn’t even begin to close any time soon.

For the US, this bullish scenario has similar limitations, but not quite as severe, so the output gap could start to narrow some and employment as a percentage of the population begin to improve. But only modestly.

The US fiscal cliff is for real, but still far enough away to not be a day to day factor. And it at least does show that fiscal policy does work, at least according to every known forecaster with any credibility, which might open the door to proactive fiscal? Note the increasing chatter about how deficits don’t seem to drive up interest rates? And the increasing chatter about how the US, Japan, UK, etc. aren’t like the euro zone members with regards to interest rates?

Same in the euro zone, where discussion is now common regarding how austerity doesn’t work to grow their economies, with the reason to maintain it now down to the need to restore solvency. This is beginning to mean that if they solved the solvency riddle some other way they might back off on the austerity. And now there is a political imperative to do just that, so things could move in that direction, meaning ECB support for member nation funding, directly or indirectly, which removes the ‘ponzi’ aspect.

Not even a passing mainstream thought to look at currency users like France, Spain, Italy, California, and Illinois, that are facing severe market discipline via solvency/interest rate risk any differently from currency issuers like the UK, US, Japan, and Denmark where those types of market forces remain stubbornly inapplicable.

One would think something so obvious and ‘in their face’ year after year, decade after decade, might get their attention…

Hollande faces budget shortfall test

(FT) François Hollande has promised that he would take whatever measures necessary to rein in France’s heavy public debt, which is rising close to 90 per cent of gross domestic product. He knows that to win backing for his growth initiative from German chancellor Angela Merkel depends on assuring her that France will meet its obligations on its own public finances. The European Commission’s forecast projected a budget deficit next year of 4.2 per cent, compared to the target of 3 per cent set by Brussels and to which Mr Hollande is committed. That amounts to a gap of some €24bn. Mr Hollande is unlikely to give further details of his plans until he gets an independent report on the public finances at the end of June (after National Assembly elections).

Dutch austerity consensus unravels

(FT) Freedom party leader Geert Wilders brought down the country’s ruling coalition last month when he pulled out of talks over budget cuts needed to meet strict EU deficit limits, triggering elections scheduled for September 12. Mr Wilders is campaigning fiercely against what he calls the government’s “subservience” to Brussels’ demands for budget cuts. A poll released on Monday suggests voters are turning against the last-minute budget deal reached after the government fell between the ruling liberals and centre-left opposition parties. The April 26 deal pledged the Netherlands to meet an EU deadline to slash its 2013 budget deficit to below 3 per cent of gross domestic product, down from a projected 4.7 per cent.

Italy, Then and Now

As previously discussed, for all practical purposes there is no political support for leaving the euro. The various populations simply do not trust their own governments with their currency:

Greece’s Tsipras: We Want Euro, but Not Austerity

By Michelle Caruso-Cabrera and Jennifer Leigh Parker

May 10 (CNBC) — The head of Greece’s Radical Left Coalition, Alexis Tsipras, told CNBC Thursday that he will “go as far as I can” to keep Greece in the euro zone, despite declaring earlier this week that the Greek bailout agreement is “null and void” and should be abandoned.

Tsipras (pronounced SEE-Pras), who was unable to form a coalition government this week after his party came second in Sunday’s election, said a Greek exit from the euro zone would be “disastrous.”

Tsipras said he is willing to negotiate with the so-called troika — the International Monetary Fund , the European Union, and theEuropean Central Bank — to keep Greece in the euro zone.

CIC Stops Buying Europe Government Debt on Crisis Concern

By Andres R. Martinez

May 10 (Bloomberg) — Gao Xiqing, president of China Investment Corp., said the nation’s sovereign wealth fund has stopped buying European government debt on concerns about the region’s financial turmoil.

CIC will continue to look for new investments in Europe as part of its strategy to boost allocations to infrastructure, private-equity assets as well as emerging markets to help boost returns, Gao said. CIC, with an estimated $440 billion in assets, is the world’s fifth-largest country fund, according to Sovereign Wealth Fund Institute.

“What is happening in Europe right now is of course of concern,” Gao said in an interview in Addis Ababa, Ethiopia, during the World Economic Forum on Africa. “We still have our people looking at opportunities in Europe, even though we don’t want to buy any government bonds.”

Europe’s turmoil is reigniting on the second anniversary of policy makers’ first attempt to prevent Greece’s woes from spreading. That raises fresh doubt over the strategy just as Greece’s election spurs concern that the country may not meet the terms of its international rescues and will seek a solution outside the euro.

In case you thought US voters were any different than their euro counterparts:

61% Believe Europe Needs to Cut Government Spending to Save Economy

May 9 (Bloomberg) — Newly elected leaders in France and Greece have signaled that austerity efforts in their countries may be coming to an end, but as far as Americans are concerned, that’s a move in the wrong direction. A new Rasmussen Reports national telephone survey finds that 61% of American Adults believe cuts in government spending would do more to improve the economic and financial situation in France and Greece than increases in that spending. Just 20% think more government spending is the better way to go. Eighteen percent (18%) are not sure. (To see survey question wording, click here.)

The survey of 1,000 Americans nationwide was conducted on May 7-8, 2012 by Rasmussen Reports. The margin of sampling error is +/- 3 percentage points with a 95% level of confidence. Field work for all Rasmussen Reports surveys is conducted by Pulse Opinion Research, LLC. See methodology.

See below, seems 75% still support the euro vs trusting their own leaders with their own currency.

Also, unfortunately, the non MMT world pretty much still fails to grasp that mass unemployment is a macro problem and a manifestation of unspent income. That the only way the output gap gets filled is by some sector spending more than its income; and that the issuer of the currency is the only entity that isn’t inherently revenue constrained when it spends.

EU’s Response to Crisis Will ‘Convince People,’ Van Rompuy Says

May 9 (Bloomberg) — European Union President Herman Van Rompuy said the EU’s response to the sovereign-debt crisis will “convince people” of the value of being in the 27-nation bloc.

“We will convince people of the sense and the meaning of EU membership by results,” Van Rompuy said in a question-and- answer session posted on the Euronews website today. “That’s why we have to stabilize the euro zone and that’s why we have to increase economic growth and create jobs.”

“There is still a huge majority in most of the countries for membership of the European Union and the euro zone,” Van Rompuy said. “Even in Greece, I saw an opinion poll just before the election which said that 75 percent of people don’t want to leave the euro zone.”

Note how ‘currency users’ are limited to relatively low levels of debt by markets:

Valencia’s total outstanding debt at the end of 2011 was EUR20.76 billion, equal to around 20% of its GDP.

Spain ran up it’s current national debt as a currency issuer when it not only didn’t matter financially with regards to funding and solvency, but it was, for all practical purposes, a requirement to accommodate non govt savings desires at desired levels of output and employment.

Spain, and the rest of the former currency issuers, then waltzed into the euro zone arrangements as currency users who all agreed to keep the same debt levels they had accumulated as currency issuers, rendering the euro arrangements ‘an accident waiting to happen’ from the get go.

Spain’s Valencia Struggles To Repay Debt

By Jonathan House and Art Patnaude

May 4 (Dow Jones) — Spain’s financially troubled Valencia region had to pay a punitive interest rate to roll over a short-term debt Friday, raising new concerns about its solvency and prompting the regional government to offer assurances it can avoid a default.

“We have covered our refinancing needs through June and we are planning on meeting our commitments,” a Valencia spokesman said.

Valencia had to offer institutional investors a 7% interest rate to roll over a EUR500 million debt for six months on Friday, a new sign of a deepening financial crisis for the regions that control over one third of spending in highly decentralized Spain. That’s more than four times what the Spain’s central government offered at its last auction of six-month treasury bills.

With a long history of overspending, Spain’s regions have moved to the center of the country’s fiscal crisis. As Prime Minister Mariano Rajoy tries to close yawning budget gaps at all levels of government and return the ailing local economy to growth, his government is scrambling to make sure the regions meet their financial obligations while reining in expenditures.

Spain had a general government budget deficit equal to 8.5% of gross domestic product in 2011, far in excess of the 6%-of-GDP target it had committed to with the European Union and international investors. Much of the overrun was the fault of the regions.

In recent months, the fiscally frail regions are facing increasing difficulty in financing themselves. International investors are steering clear. “There’s still a great deal of reluctance from institutional investors to get involved in Spain. The uncertainties are a bit too big,” said Elisabeth Afseth, fixed-income analyst at Investec Bank in London.

Valencia, on Spain’s Mediterranean coast, is one of the most troubled of its 17 regions. With its hundreds of kilometers of beachfront properties, it is ground zero for the collapse of the Spain’s housing industry, which has punched a large hole in national tax revenue and sent the economy into a long slump. The housing bust, coupled with years of high spending, has made Valencia one of the most indebted regions.

Valencia’s total outstanding debt at the end of 2011 was EUR20.76 billion, equal to around 20% of its GDP.

Late last year, Moody’s Investor Service downgraded Valencia’s credit to junk status and the central government had to advance Valencia some of its regular financing to prevent it from defaulting on a EUR123 million debt to Deutsche Bank AG (DB). In Spain, most tax revenue is collected by the central government.

Since then, Rajoy’s government, which came to power in December, has strengthened financial support for the regions and said it won’t let any default on their obligations. It set up an EUR10 billion credit facility they can draw on to refinance their debts and is offering EUR35 billion worth of loans to help them pay off debts to suppliers.

The Valencia spokesman said his region has received EUR2.69 billion from the credit facility that will allow it to meet all its debt obligations in the first half of the year. In addition, Valencia and other regions are pushing hard to get Madrid agree to guarantee their debts, which should help lower borrowing costs, he added.

Valencia has to refinance EUR4.5 billion worth of debt this year.

Why the Eurozone is destined to fail

By Bill Mitchell

Typical day for euro zone news.
Slow motion train wreck continues.

Headlines:

EU Finance Ministers to Face Off Over Rules to Implement Basel Ill Standards
France’s Hollande Says He Hasn’t Had Parallel Talks With Merkel
Weidmann Says Reforms Are Best Basis for Growth, Zeit Reports
European Unemployment Rate Rises to Highest in Almost 15 Years
Euro-Region Manufacturing Contracts for a Ninth Month
German Unemployment Unexpectedly Rose in April Amid Crisis
Spain Can Finance Itself, Even If Expensive, Fekter Says

Yes, larger deficits are needed to support aggregate demand at desired levels.

However, the problem is the national govts are currently like US states and as such are revenue constrained.

So relaxing the deficit limits without some kind of ECB funding guarantees can cause markets to abstain from funding the nat govts.

Said another way, without the ECB the euro members are currently deep into ‘ponzi’.

Brussels to relax 3pc fiscal targets as revolt spreads

By Ambrose Evans-Pritchard

The European Commission is preparing a major shift in economic strategy, fearing that excessive fiscal tightening will inflict unnecessary damage on a string of eurozone countries.

The 10th plague, as the infection spreads to the core?

The surprise is that it took so long, with austerity eroding export markets.
And note the drop in the employment index as well.

German Manufacturing Shrinks at Fastest Pace Since 2009

By Alice Baghdjian

April 23 (Reuters) — Germany’s manufacturing sector unexpectedly shrank at the fastest pace in nearly three years in April, denting hopes it can drive growth in the euro zone and casting a shadow over upbeat business sentiment surveys.

Markit’s manufacturing Purchasing Mangers Index (PMI) fell sharply to 46.3 from March’s 48.4, according to a flash estimate released on Monday, well below the 50 mark which would sign al growth in activity.

It marked the fastest rate of contraction since July 2009 in the sector, which has been hit by a decline in some exports as the debt crisis in the euro zone has choked demand from key trading partners.

Reports are that sales to southern Europe are particularly weak, so there is some evidence of troubles in the periphery (of the euro zone) spilling over to the core,” said Chris Williamson at Markit, adding that global trade was also sagging.

Germany produces exports that people want to buy when growth is good but cut back on when there are worrying signs, and that’s what we’ve got at the moment,” he said.

Germany’s export-driven economy, the largest in Europe, recovered swiftly from the 2008/09 global financial crisis, interrupted only by a 0.2 percent contraction in the final quarter of last year on weak exports and private consumption.

Many economists now believe this to be just a hiccup and that Germany will avoid a recession, generally defined as two consecutive quarters of contraction.

But worries about the finances of big euro zone economies such as Spain and Italy have unsettled markets in recent weeks, despite tentative signs at the beginning of the year that Europe’s more than two-year debt crisis was easing.

The manufacturing reading undershot expectations for an increase to 49.0 in a Reuters poll, with a number of indices within the survey contracting at a faster rate than in the previous month.

The PMI’s composite index, a combined measure of services and industry, fell to 50.9 from a final reading of 51.6 in March, hovering just above stagnation. Employment fell for the first time in more than two years with the employment index dipping to 49.2 from 51.7 in March.

UPBEAT SURVEYS

A companion survey, however, showed the pace of growth in the services sector increased slightly to 52.6 from 52.1 in March.

It beat the consensus forecast of 52.3 in a Reuters poll.

The German consumer has got some confidence in his spending so that’s helping the domestic economy, certainly at the moment,” Williamson said, adding further deterioration of the headline PMI figures could dent growth in the services sector.

Confidence in Europe’s bulwark economy has so far shown resilience to recent disappointing industry data.

In February, German industrial orders rose less than expected, although strong demand from non-European countries provided some momentum, and industrial output fell more than expected due to cold weather.

Last week the closely-watched ZEW index charting analyst and investor sentiment reached its highest level in nearly two years and the Ifo business climate survey inched to its highest level since July 2011, despite expectations that confidence would wane this month.

I’m surprised that (the surveys) are staying so buoyant at the moment,” Williamson said, adding that the PMI usually turns down before the confidence-based surveys.

There is an inflection point now where companies have a reasonable amount of business in their pipeline, but they are reducing that. You’ll soon see those overall indicators from Ifo start to come down again, I think it will be quite soon.”

Composite PMI input prices eased but still grew faster than output prices.

German companies say they expect challenges for the year ahead, with German car maker Volkswagen (VOWG_p.DE) bracing for a very demanding year” as the European debt crisis weighs on auto markets and global economic growth slows.

Williamson said he did not see output prices rising for some time until demand picks up.

They will compensate for that (cutting selling prices) probably through staff cost reductions, which is why we are seeing employment start to fall now,” he said.

They will simply have to fight to stay alive,” he said.

So if all the member nations stop taxing in euro and start taxing in their own currencies, the value of the euro goes to 0. And all the national govt debt denominated in euro goes worthless, along with all other euro denominated debt, thereby eliminating it.

Like this would fix it all:

EU slams governments for not enacting growth laws

April 18 (Bloomberg) — “It is incomprehensible that member states are still not fully implementing growth-friendly legislation we have in place,” European Commission President Jose Manuel Barroso told the European Parliament. The EU’s internal market “is probably the largest engine for growth within the European Union,” Barroso said. It has to become easier to transfer pensions from state to state and the way cross-border workers are taxed needs to be simplified, the Commission said Wednesday. Job seekers should be able to receive their unemployment benefits for up to six months while they are looking for a job in another country and states should start hiring non-nationals for jobs in their public service, it added.

Euro-Area Construction Declines for Third Month Led by Germany
Bundesbank Says Euro Nations Must Set Aside Growth Concerns
Merkel Gives Spain No Respite, Says Debt Cuts Key to Yields
Germany wants IMF funding raised to $1 trillion
IMF Lowers Additional Funds Target To $400bn-Plus: Lagarde
Spain weighs financing options
Spain Reduces Flexibility of Labor Reform, Expansion Reports
Bank of Spain Questions Budget Forecasts, Calls for Prudence
Spain Is Back in Recession, Central Banker Warns
Spanish Banks to Set Aside $71 Billion for Real Estate Cleanup
IMF’s Lagarde Sees Scope for ECB Monetary Easing, FAZ Reports
IMF sees Italy missing budget deficit targets
Italy Probably Shrank 0.7% in First Quarter, Bank of Italy Says

Institutionalizing death by 1000 cuts:

Spanish Law Aims To Rein in Budget

(FT) Spain’s plan to toughen the central government’s control of regional finances passed its first legislative hurdle in a parliamentary vote Thursday. “This is a law that will serve as the foundation for policies to make Spain’s budget deficit disappear, so that Spain goes back to being a reliable European Union partner,” Budget Minister Cristóbal Montoro said after the bill passed the lower house of Parliament. The law will now go to the Senate, where it also is expected to pass. The new law will require that all levels of Spanish government have balanced budgets by 2020 and that the government lower its debt-to-GDP ratio to 60% by that year as well. The government has forecast its debt-to-GDP ratio will rise to around 80% this year.

If the Spanish banking system is now capital constrained with regard to buying more Spanish govt debt, liquidity adjustments by the ECB won’t matter.

In my opinion, global markets are not even close to discounting the systemic risk, as they are over discounting the capability of central bankers to deal with what might happen.