Berlin’s governing elite leads Eurozone to recession to win the September election in Germany

José Manuel Barroso, President of the European Commission was invited to Berlin, where he took part in a discussion on European competitiveness with Members of the European Roundtable of Industrialists (ERT) and Angela Merkel, German Federal Chancellor. (European Commission Audiovisual Services, 18/03/2013).

As if everything was rosy and growing in the Eurozone, the German federal ministry of Finance issued yesterday a press release demanding that everybody in the euro area continues on the same line of economic policies, targeting financial and fiscal consolidation by using severe austerity measures mainly in deficit countries. For Germany proper Eurostat found that this country was the only one in Eurozone to record government budget surplus of 0.2% of the GDP for 2012. Unquestionably Berlin insists on applying the same pro-cyclical policies which are invariably leading Eurozone to long-term stagnation.

One after the other all macroeconomic indicators show that the long-awaited resumption of economic activities in Eurozone fades away. In view of all that the International Monetary Fund was forced to openly comment that Eurozone, and more so Germany should abandon their pro cyclical policies. The relevant quote from the press release after the IMF-World Bank spring meetings last weekend read as follows:”Growth in the euro area as a whole has yet to materialize. Continued progress in improving public finances is essential in most advanced economies. Where country circumstances allow, fiscal policies should avoid pro-cyclicality, focus on structural balances, and let automatic stabilizers operate fully to support growth”.

More bad news

Unfortunately there is more bad news for Eurozone. The European Central Bank published today a press release on its quarterly Bank Lending Survey (BLS) containing negative findings. Demand for credits by business and households is further declining, indicating a deterioration of economic activities. ECB’s BLS for April 2013 relate to changes during the first quarter of 2013 and expectations of changes in the second quarter of 2013. The survey was conducted between 20 March and 4 April 2013. With 135 banks participating in the survey, the response rate reached 100%.
According to the April 2013 BLS, “the net tightening of credit standards by euro area banks for loans to enterprises declined in the first quarter of 2013 (to 7%, compared with 13% in the fourth quarter of 2012). The level of net tightening of credit standards for loans to enterprises in the first quarter of 2013 currently stands below its historical average calculated over the period since the start of the survey in 2003. The net tightening in the first quarter of 2013 decreased – albeit to a lesser extent – for loans to households for house purchase (to 14%, from 18% in the fourth quarter of 2012) remaining, however, slightly above its historical average, and for consumer credit (to 7%, from 9% in the fourth quarter of 2012), with net tightening at its historical average. The decline in the net tightening of credit standards for both non-financial corporations and households in the first quarter of 2013 reflected somewhat reduced contributions from banks’ risk perceptions as well as from cost of funds and balance sheet constraints. This notwithstanding, borrowers’ risk and macroeconomic uncertainty remain the main concerns of euro area banks in setting their lending policies”.

Lower expectations

It’s not only the ECB that rings the dander bell for 2013. Markit Economics, an independent, global provider of business surveys found that the well-known Purchasing Managers’ Index for Eurozone and Germany deteriorate fast. The relevant yesterday’s announcement goes like that: ”Eurozone suffers ongoing downturn in April as Germany sees renewed downturn Flash Eurozone PMI Composite Output Index at 46.5 (46.5 in March). Flash Eurozone Services PMI Activity Index at 46.6 (46.4 in March), a two-month high. Flash Eurozone Manufacturing PMI at 46.5 (46.8 in March) a four-month low. Flash Eurozone Manufacturing PMI Output Index at 46.3 (46.7 in March), a four-month low. Data collected 12-22 April. The Markit Eurozone PMI ® Composite Output Index was unchanged on March’s reading of 46.5 in April, according to the flash estimate. The sub-50 reading indicated a drop in activity for the nineteenth time in the past 20 months, the exception being a marginal increase in January 2012. Activity fell sharply again in both manufacturing and services. While the former saw the steepest rate of decline for four months, the latter saw the downturn ease slightly compared with March. New business fell for the twenty-first successive month, with the rate of deterioration accelerating for the third month in a row to signal the steepest decline since December. Marked falls were seen in both manufacturing and services. Divergent trends were evident in the region’s two largest member states. While France saw the rates of decline in both business activity and new business ease sharply to the slowest for four and eight months respectively, Germany saw both activity and new business fall at the steepest rates for six months. The drop in German activity was also notable in being the first since last November. Elsewhere across the region output fell at the slowest rate for three months in April, though the rate of loss of new business remained marked… The ongoing deterioration in the order book pipeline prompted firms to cut payroll numbers for the sixteenth month running. The rate of job losses accelerated slightly on March, reflecting stronger rates of job shedding in both manufacturing and services”.

Commenting on the flash PMI data, Chris Williamson, Chief Economist at Markit said: “Although the PMI was unchanged in April, the survey is signalling a worrying weakness in the economy at the start of the second quarter, with signs that the downturn is more likely to intensify further in coming months rather than ease. Thanks to an upturn in the survey at the start of the year, the PMI suggests that euro area GDP fell by around 0.2-0.3% in the first quarter after a 0.6% drop at the end of last year. However, the April reading points to a 0.4% rate of decline, with downside risks. Worryingly, the rate of loss of new business gathered further momentum, suggesting that activity and employment could fall at steeper rates in May”.

Unquestionably Germany is leading Eurozone downwards into a new stagnation period. Seemingly Berlin thinks that this new recession will be much less harsh to Germany and will secure for Germany more comparative advantages in the future. At the same time the country’s governing political elite seems to believe that this is the best policy to enhance their electoral potential in view of the September general elections in the country. The severe austerity policies followed are thought also to reduce the demands for more German financial help to the weak euro area members. No need to mention how unpopular any such help is in Germany.

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