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Saturday, 7 January 2012

Are the economies of the United States and the leading Euro-zone countries diverging currently? Elaboration of a Twitter discussion with my friend Matt Busigin.

The last days the Euro and the Euro-zone were again all over the place:
  • 'Merkozy' are preparing yet another decisive summit on the future of the Euro at the end of this month
  • France needed to roll-over €8 bln in long-term sovereign debt at much more unfavorable interest rates;
  • The financial and economic situation in Spain is becoming more desperate every day, with a soaring budget deficit and state-debt, that seem to be negatively adjusted per week, rising unemployment and people that are getting more desperate by the hour;
  • Greece is according to Greek insiders 'ready for stepping out of the Euro' (which I seriously doubt, by the way);
  • And according to others, the 'whole euro is on the brink of a total meltdown'. Large companies are already preparing for an exit out of the Euro-zone; 
People should almost get in a state of shock by reading so much bad news on the Euro and the members of the Euro-zone. For these people I have some relatively good news.

Last year on January 27, 2011, I wrote my third post: Greece and Ireland out of the Euro? Don't put your money on it!'. In those days the same rumors were spread on Greece and (at the time) Ireland, stating that both wanted to step out of the Euro-zone. Until now all these rumors have been proven unjustified.

It is very much true that the European Union has messed up big-time in trying to save the Euro and the PIIGS-countries. And of course you could say, that you only notice the results of falling into an abyss at the moment that you hit the ground.

Still, I don't want to flock in the herd of Euro-doomsday talkers that are crowding the internet currently. I am convinced that 'the politicians get going in Europe when the going gets really, really tough'.

But now doesn’t seem the time for this yet, as far as the politicians are concerned. This is especially frustrating for the financial markets and for the people living in the PIIGS-countries, but this is the way how it works in Europe. Europe more often moves like a snail than like a cheetah.

What is more interesting for me, is the question why the economies of the United States and the leading Euro-zone countries (Germany, The Netherlands, Austria and France) seem to be diverging so strongly at the moment?!

My attention was drawn to this subject as a consequence of one of my pleasant discussions at Twitter with the savvy software engineer and amateur-economist Matt Busigin of http://www.macrofugue.com/, one of the people that I consider to be a friend.  

While the economies of the United States and Canada already seem in the middle of an uphill climb out of the depression, the leading European economies still seem to be in a downhill phase of that same depression:


Of course, the strongest Euro-countries carry the burden of the weaker Euro-countries (hence, the PIIGS and the East-European countries (especially Hungary)) in three ways:

  • Directly (financially), through billions of Euro's in government support money and (possible) write-offs on loans to the weak countries;
  • Indirectly (financially), through refinancing programs and government aid for banks, insurance companies and pension funds that need to be saved from bankruptcy or serious downgrades, as a consequence of of assets degradation.
  • Economically, through diminishing export possibilities as a consequence of dropping demand.
However, in my opinion these reasons don't explain thoroughly the current differences between the US and f.i. Germany, France and The Netherlands.

My findings and assumptions concerning US and Canada:

  • Directly after the crisis started, the US and Canada went through a process of violent debt destruction and rapidly rising unemployment (see the following chart). The housing market got huge blows and enormous numbers of retail and other companies defaulted.
US unemployment rate 2001-2011
Courtesy of Bureau of Labor Statistics (www.bls.gov)
Click to enlarge

  • Due to the speed and violence of the debt destruction process in many industries, the process started quickly and is probably largely finished now, only 5 years after the first symptoms of the credit crisis in the US. The US labor market is lean and mean again and companies have probably reduced their production facilities to the level that is necessary for the current markets.
  • Lately, I noticed a bullish optimism in the tweets and articles of people that I think highly of: people like Andrew Nyquist, Kevin Depew, Conor Sen and Professor Pinch of Minyanville  (http://www.minyanville.com/)  and Matt Busigin.
  • Although the distinguished Todd Harrison, founder of Minyanville, is much more bearish in the long run, he also foresees a (short-lived) bull-market for the coming months.
  • Cloud computing and social media seem to be the developments that are currently lifting the US economy to a new level of activity.
  • The production data, employment data and consumption data of the US and Canada, although still in the lower regions, show undeniable signs of growth and improvement.
  • The housing market seems to finally be at the bottom of the parabola in the US and there is reason for moderate optimism.
  • It seems that the people in the US are simply sick and tired of being bearish and just want to be bullish again. Such a sentiment can be a very strong catalyst for economic growth.
My findings and assumptions concerning the leading Euro-zone countries:

  • The consumer confidence in The Netherlands and France is very poor at the moment. The consumers in these countries seem to have lost all confidence in the economy. The data in Austria and Germany is not much better. See for instance this chart that I earlier posted in my Outlook for 2012 and that is based on Eurostat data.
Consumer confidence in the leading Euro-countries.
Data courtesy of Eurostat (ec.europa.eu/Eurostat)
Click to enlarge
  • From the four leading Euro-countries only France had a more than moderate growth of unemployment with 2.3% after the Lehman default in September 2008. Austria, The Netherlands and Germany all stayed below 1.6%, which is extraordinary low for such a big crisis (see the following chart based on Eurostat data):
Unemployment in the leading Euro-countries from 2008-2011
Data courtesy of Eurostat
Click to enlarge
  • The Netherlands is now the only country of four where unemployment actually has been rising for some months. Germany, Austria and France have an (almost) equal or lower unemployment than mid-2011.
  • The Netherlands also has a layer of 700,000 freelance professionals, almost 8.9% of the labor market, while Germany has even 11% or 4.4 mln independent workers (it´s not clear if this number includes retailers).
    • In case of a contracting economy, this flexible layer can be laid off very quickly. This is already happening in The Netherlands at the moment.
  • Dutch companies were very reluctant to lay-off people during the 2008-2009 crisis, as they reckoned that qualified personnel could be hard to find when the economy would expand again.
    • Keeping this excess personnel had a negative influence on the reserves of these companies, as productivity dropped.
  • Considering the previous bullet and looking at the moderate growth of unemployment in all four countries directly after the crisis started, I assume that these countries and especially The Netherlands and Germany are still in a situation of overcapacity: in the financial industry, the manufacturing industry, the services industry and perhaps even in the agricultural industry.
    • This is not such a problem when exports remain at a high level, but very dangerous when exports go down.
    • Besides that, internal consumption in Germany and The Netherlands is below normal for such wealthy countries, due to cautious consumer spending in The Netherlands and years of wage restraint policy in Germany, setting back wealth development of German workers
    • Given the fact that the financial reserves have diminished during the last three years (at least in The Netherlands), this could lead to a soaring unemployment when demand stalls.
  • Especially the Dutch housing market is still in a 'bubblicious' state, while the Dutch mortgage debt is an astonishing 120% of GDP. The number of people in arrears is soaring at the moment. All the ingredients for violent debt destruction seem to be present in The Netherlands.
  • The key economic factors seem to point downwards for Austria, Germany, France and The Netherlands.

If you look at the mentioned differences between the US and the leading European countries you get the idea that the Euro-zone might be in for a very bumpy ride in the coming years, while the US economy could very well be at the way up.

The crisis in Europe hardly seemed to cause any pain outside the PIIGS-countries in numbers of unemployed workers. In my opinion this can be considered as a bad omen. Also the process of debt destruction in the leading Euro-countries is only at the beginning. If the export stays up, the leading European countries might have experienced the easiest depression ever.

However, I have the idea that exports won´t stay up and that the depression has only just started in Europe. This might cause the economies of the US and Europe to diverge strongly in the coming years; a situation that might last for quite some time.

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