Words ought to be a little wild, for they are the assault of thoughts on the unthinking
- J.M. Keynes

Wednesday, 24 October 2012

Schauble Says Sell


After reading the headline my first thought was ‘Contrarian indicator’. But looking at the news, it seems that Schauble may be right. The worst is yet to come. Consider the following:

1. It is now confirmed that the banking union will be stillborn.

According to the Handelsblatt, bank resolution schemes will remain national with no obligation for one nation to give funds for resolving another nation’s banking failures. This is equivalent to each state in the USA having an independent version of FDIC with no obligation to pool funds and fight a crisis together. What are the chances of Texas giving money to California?
Of course, the divide over regulatory decision-making power for non-Euro EU states still continues. Offers are being made in which ECB governing council (Eurozone states only) will “explain itself” if it overrules the regulatory body (composed of both Euro and non-Euro states). It will be interesting to see how many agree to surrender actual power in the hope that their decisions will be respected. 

2. While the hopium is wearing off the European Parliament (EP) and the European Commission (EC) think the current year is 2006. Or that austerity begins in someone else’s home.

EC’s demand for €9bn more for 2012 budget commitments has been agreed by EP. MEP’s also called for a 6.8% rise in the budget for 2013. This will really increase support for the EU and reverse the erosion of enthusiasm amongst citizens shown by opinion polls.

3. Meanwhile, states which do not have the luxury of asking for a budget increase are nevertheless adamant that spending should not be drastically curtailed.

Greek leaders have failed to agree to Troika mandated cuts to public sector pay. 

4. Amidst the political squabbling, the economy is now firmly heading down.

Today’s PMI numbers showed “the combined output of themanufacturing and service sectors dropping at the fastest rate since June2009”. IFO numbers from Germany were pretty dire as well with business climate, current conditions and expectations all dropping and worse than expected.

Despite all this, Schauble’s statement at least shows that key decisionmakers are cognizant of the dangers which lie ahead. But this isn’t a contrary indicator marking a 2009-US-style turnaround for Europe. Then bodies were on the road, blood on the streets and a comprehensive plan enacted for bank recaps, easy money and fiscal boost. None of these conditions are true yet for Europe.

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