Thursday, January 5, 2012

A stark reminder of the north-south eurozone divide

The FT had an interesting article highlighting the north-south divide in the eurozone:
The starkly contrasting economic trajectories of countries inside the eurozone were highlighted on Tuesday as Germany reported unemployment at 20-year lows while Spanish jobless figures rose for the fifth consecutive month.
Moreover, there is an interactive graphic in the article showing the different unemployment rates by country.

While the latest eurozone seasonally adjustment unemployment rate is 10.3%, compared to 10.1% a year ago, there are vast gaps in unemployment rates between member states. Most notable are Germany at 5.5% (vs. 6.8% a year ago), the Netherlands at 4.8% (vs. 4.4%) and Austria at 4.1% (vs. 4.2%). The underperforming PIIGS are suffering vastly higher unemployment, with Greece at 18.3% (vs. 13.9%), Ireland at 14.3% (vs. 14.2%), Portugal 12.9% (vs. 12.3%), Spain at an astounding 22.8% (vs. 20.5%) and Italy an outperformer at 8.5% (vs. 8.4%). As a point of reference, the unemployment in France, which is the other major partner in the eurozone leadership, stands at 9.8% (vs. 9.7%).

How badly will austerity bite?
Please note that these unemployment figures are dated October 2011, before the full brunt of many announced austerity programs have been felt. As the effects of these cutbacks start to wind their way through these economies, will unemployment go up or down?

How long before the elites are faced with a political backlash?

The Guardian reported that the new Greek government is fed up with new demands and playing a game of brinkmanship again [emphasis added]:
Greece was promised a second emergency bailout worth €130bn (£108bn) in October after it became clear that the first rescue package, agreed in May 2010, was not enough to stabilise its debts.

But talks about this second deal, including a writedown for Greece's private-sector lenders, are still continuing. Kapsis told Greek television: "This famous loan agreement must be signed, otherwise we are outside the markets, out of the euro and things will become much worse."

Reports have emerged since the weekend that the troika could demand fresh austerity measures from Athens in exchange for a new loan to ensure that it meets its targets for reducing the deficit. But Kapsis also said imposing more cuts on a recession-hit nation could be very difficult.
They have threatened to leave the euro within three months unless they get relief:
The Greek government has stepped up the pressure on its eurozone paymasters by warning that unless a new bailout for the recession-hit country is agreed within the next three months it will be forced out of the single currency.

No doubt much of this rhetoric is typical of the posturing that goes on in negotiations, but as austerity programs begin to bite all over Europe, investors will start to worry about and price in the tail-risk of social upheaval and political instability.

The ECB's LTRO program of unlimited liquidity has bought the politicians some time. Don't be too surprised if that window of time may be shorter than expected.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.


Macro Rants said...

First of all, spending within your means is not austerity -- most people outside banking call spending within your means "reality"

Second, its absurd to claim that withdrawal symptoms are the problem, and not the decision to get high in the first place.

No one told these people to get hooked on debt spending in the first place -- THAT was the problem.

Third, you seem to be glossing over the east-west divide in the Eurozone. Sauerkraut and baguettes do not go together

Cam Hui, CFA said...

"Are there no prisons or poor houses?" Scrooge asked..."My taxes go to pay for the prisons and the poor houses, the homeless must go there."

Macro Rants said...

Mr Hui -- none of the bank CEOs have ended up in prisons or poor houses

Cam Hui, CFA said...

We have regulatory capture by the banking system, particularly in the US - and that's a problem.

The issue I was raising is that you can't expect millions of Greeks and other Club Med Europeans to toil for generations just to repay such an unsustainable level of debt. Investors have to be prepared for such adjustments and that day of reckoning may be sooner than we all expect.

Macro Rants said...

Expecting German people to toil for generations to pay for Greek retirements and Brussels bureacracy isn't reasonable either.

Expecting US citizens to toil for generations so Bernanke can pretend to understand currency swaps is also unreasonable.

To suggest that "austerity biting" is the problem (and not just a symptom) is a fraudulent effort to preserve the status quo.

I don't think you were telling the whole truth about EU unemployment... Youth unemployment in the EU is MORE THAN DOUBLE the average (around 22%).

Since absolutely no one is talking about balancing spend in the near term, much less paying the debt back -- guess who will be asked to repay the debts used to delay reform?

Yep, the unemployed next generation. The ones who did not vote for the EU in the first place.

Forcing a failed generation to pay its debts before they enter retirement is not austerity.

Expecting future generations to practice real austerity so the current leaders can avoid responsibility is insane. said...

Interesting to see a north south divide within the eurozone. There is a large north south divide in the UK.