Europe and the Euro-zone: It seems that the shit hits the fan, where it concerns Spain and Italy.

If you follow the messages on Twitter and in the financial news sources, you are struck by an increasing sense of panic in the financial market, concerning the financial situation of Italy and Spain, which leads to enormous yields on Italian and Spanish bonds.

The Greek, Irish and even Portuguese sovereign debt crises were mostly painful, annoying and awkward, like being stung by a wasp. The equivalent for a Spanish and Italian sovereign debt crisis, however, is being hit by a jumbo jet: there are a lot of similarities between those events, but the impact of the latter is way bigger.

The national debt of Italy alone is a staggering €1.7 trn Euro and although the national debt of Spain is relatively low, it is still €886 bln. The thought that the other countries in the Euro-zone should warrant this huge amount of debt to keep the Euro alive, is already mindboggling.

But, it is exactly this thought that is turning more and more into reality, due to the continuous panic on the financial markets. Although the sovereign debt crises in Spain and Italy have a different background, there are a few highlights in both economies that might explain it (see table)

Spain	Italy
Large unemployment (> 20%)	A huge national debt (>115%)
Huge youth unemployment (>40%)	Anemic economic growth since 2000
A large budget deficit  in 2010 (>9%)	Organized crime
Anemic economic growth	A government leader that lost authority, due to his erratic behavior
Anemic industry	A strong division and acrimony between the wealthy north  and the struggling south regions of the country
A residential real estate bubble	Widespread corruption

If you would look at the countries individually, there would be no reason for acute panic:

·    Italy has a huge debt, but the country has also a modern, vivid manufacturing and (financial) services industry and an adequate earnings capacity for the future.

·    Spain is a problem child with its unemployment, its RRE and CRE bubble, its anemic manufacturing industry and its lack of adequate earnings capacity for the near future. However, it has a national debt that is not especially high (64.5% of GDP according to the IMF).

The current reason for the panic on Spain and Italy, however, is that Europe and the Euro-zone messed up big time in dealing with the Greek, Irish and Portuguese sovereign problems. With an initial ‘extend and pretend’ strategy for Greece, Ireland and Portugal, the Euro-zone lost all authority. This was reinforced by the fact that the European leaders were openly quarreling and jawboning on about every subject, concerning the rescue of these three PIIGS-members.

The Euro-zone acted like a cowboy that was provoked into a big duel, but didn’t have enough bullets in his gun. All bullets have now been shot at Greece and now the gun is empty, while the more dangerous cowboys Spain and Italy are approaching. The financial markets sense this: hence, the panic.

To give you a smell of this panic, I collected some articles on the latest developments in the Euro-zone. Here are the pertinent snips of these articles, accompanied by my comments:

Statement by President Barroso on the euro area sovereign bond markets

"Developments in the sovereign bond markets of Italy and Spain are a cause of deep concern. These developments are clearly unwarranted on the basis of economic and budgetary fundamentals in these two Member States and the steps that they are taking to reinforce those fundamentals. In fact, the tensions in bond markets reflect a growing concern among investors about the systemic capacity of the euro area to respond to the evolving crisis.

The systemic nature of the sovereign debt crisis was recognised by the Heads of State and Government of the euro area at their meeting of 21 July. At that meeting, a unique solution for the crisis in Greece was found involving a partnership between the official and private creditors, but it was agreed that private sector involvement would not be a standard feature of the euro area’s crisis management.

Agreement was also reached on ground-breaking measures that will reinforce the euro area’s systemic response to the crisis by enhancing the effectiveness of the European Financial Stability Facility (EFSF), by reforming euro area governance structures and by adapting our working methods to the needs of crisis management with each institution playing its part

In my opinion, it is wise that José Manuel Barroso now confirms, what everybody with a brain already knew: that there is a true and very dangerous financial crisis situation around the Euro and Euro-zone. A crisis that might lead to an implosion of the Euro-zone when not handled properly. One trader called it ‘taking the cat out of the bag’. I call it: confessing the obvious truth.

Concerning the red and bold text: The rescue plan of July 21^st might have been a unique solution for the crisis in Greece, but it was recognized by the financial markets for what it was: too little too late!

Reuters issues its take on the news with the article: WRAPUP 4-EU says capacity to solve debt crisis in doubt:

The European Union acknowledged on Wednesday that investors now doubt whether the euro zone can overcome its debt crisis and Italy's Silvio Berlusconi called for more action to ward off market attacks.
European Commission President Jose Manuel Barroso said a surge in Italian and Spanish bond yields to 14-year highs was cause for deep concern although they did not reflect the true state of the third and fourth largest economies in the currency area.

"In fact, the tensions in bond markets reflect a growing concern among investors about the systemic capacity of the euro area to respond to the evolving crisis," Barroso said in a statement.
He urged member states to speed up parliamentary approval of crisis-fighting measures agreed at a July 21 summit meant to stop contagion from Greece, Ireland and Portugal, which have received EU/IMF bailouts, to larger European economies.

But neither he nor European Monetary Affairs Commissioner Olli Rehn offered any immediate steps to stem the crisis, which has flared again with full force less than two weeks after that emergency meeting.

Italy has borne the brunt of a selloff triggered by the unresolved debt crisis and fears of a global economic slowdown.

With many policymakers on holiday, there seemed little prospect of early European policy action, although euro zone governments were in telephone contact about the situation.

German Economics Minister Philipp Roesler said Italy and Spain were not even discussed at Berlin's weekly cabinet meeting which he chaired in place of Chancellor Angela Merkel, who is on vacation and did not call in.
The euro zone's rescue fund cannot use new powers granted at last month's summit to buy bonds in the secondary market or give states precautionary credit lines until they are approved by national parliaments in late September at the earliest.

Italy and Spain could offer new austerity measures to try to placate the markets, but Rome has just adopted a 48 billion euro savings package and Madrid's lame duck government has just called an early general election for Nov. 20.

Concerning the red paragraphes:

·    1. Barroso, as well as Olli Rehn didn’t do anything, because they couldn’t do anything. This proves the total inability of the current European governance model, which requires the approval of all European/ Euro-zone governments.

·    2. This is probably a blatant lie to spread a false image of self-confidence. If the situation in Spain and Italy was not discussed, the German government officials should be fired.

·    3.As stated above: the total failure of the current European governance model.

·    4. The Italian austerity measures of €48 billion are pathetic, when compared to the state debt of €1.7 trn, whether you like it or not.

The Wall Street Journal reports of an ECB Emergency meeting: ECB Meets Amid Debt Crisis

 

The European Central Bank's policy council meets Thursday amid some expectations that it may resume the purchase of euro-zone government bonds to prevent the debt crisis from spreading to Italy and Spain.

Many market-watchers are doubtful of a major announcement on bond purchasing, but nonetheless will be tuned in for ECB President Jean-Claude Trichet's post-meeting press conference at 1230 GMT.The ECB is widely expected to hold its key interest rate unchanged at 1.5% at the meeting, after raising rates twice since April.

It has been four months since the ECB last used its Securities Markets Program for selected bond purchases to support weaker government bond markets. But sharp declines in Italian and Spanish government bond prices, sending yields up to dangerous levels, have prompted speculation that the ECB will opt to step back in.

The ECB is the only euro-zone institution that can move quickly enough to stop the debt crisis from spreading out from earlier casualties Greece, Ireland and Portugal. ECB board member Jose Manuel Gonzalez-Paramo said last week that the ECB's bond-buying program is continuing, despite a decision by euro-zone leaders to allow the euro-zone bailout fund—the European Financial Stability Facility—to directly buy sovereign bonds in the secondary market. Nomura economists in a research note Thursday said that reactivation of the SMP was a possibility because of delays in processing the changes to the EFSF mandate.

"Amid the turmoil that is gripping the markets due to expanded EFSF implementation risks, they might just be tempted to use it as a stop-gap measure," Nomura analysts wrote. "Such a stance would be a near-term positive for Italy and Spain in particular."

The ECB only reluctantly set up the SMP program in May 2010, amidst an existential crisis for the euro as Greece was on the verge of default, because it doesn't like to indirectly provide funding to governments by buying its bonds. But the ECB would have no choice if the big economies of Italy and Spain were threatened with a fiscal meltdown.

"It is difficult to pinpoint the threshold at which the ECB would revive its SMP program, but we are convinced that the ECB will ultimately prevent any systemic event related to Spain or Italy," said Goldman Sachs economist Dirk Schumacher.

The ECB is widely expected to hold interest rates unchanged in order to await clearer signs on the economy. Mr. Trichet should offer clues on rates early in his introductory statement. If he says the monetary policy stance is "accommodative" and that the bank continues to monitor "very closely" developments related to risks of rising inflation, then another rate rise this year is likely.

Concerning the red paragraphs:

·    1. Yes, the ECB can act, where the government leaders can only talk. And yes, waiting until September seems not an option in the current crisis. But, if buying ‘junk bonds’ from the Spain and Italy is the solution that will calm down the markets is questionable. It would be like QE1 for the European Union, thus causing the inflation in the financially more stable North-Western Euro-countries to soar and the ECB would be stuck with a pile of ‘worthless’ sovereigns. And whenever was more debt, the solution for too much debt?

Cynically speaking: the best thing that could happen to Europe, was a major (financial) event in the USA, Russia, Japan or China. Only this would have the power to distract the financial markets from the smouldering forest-fire that is the Euro-zone currently

·    2. Here again, the structural weakness of the Euro-zone is disclosed: The North-Western Euro-countries could use very much higher interest rates to fight inflation. For the PIIGS, however, higher interest rates could mean the ‘death blow’.

And what all these plans don’t do, is taking away the structural imbalances between the North-Western countries in the Euro-Zone (export surpluses in combination with a capital deficit) and the PIIGS (import deficit and capital-surpluses).

Cautious Dutch labor market chooses for temporary personnel and short-term contracts. This is not a sign of a coming economic revival; rather the opposite.

Yesterday, on August 2nd, the company where I work, held its monthly personnel meeting. My company is a small, but distinguished ICT consultancy firm with an exclusive orientation on the 100 largest companies in the Dutch financial industry: large banks, insurance companies and pension funds. As the company delivers ICT consultants with ample financial business knowledge, it targets at a tactical level of the financial organizations.

Although this might seem less interesting for you, two subjects were discussed that are topical in the Dutch consultancy and temporary labor industry of mid 2011:

• The continuing pressure on the prices per hour for consultancy, as there is more supply than demand 
• The increasingly short duration of consultancy contracts over the last year. 

Since the credit crisis lifted off in The Netherlands in September, 2008, there has never been a feeling of despair in the Dutch economy, like there was in the USA or Greece. The only industries where serious pain was felt, were in the banking and insurance industry. But just like any other government in the Western world, the Dutch government saved all large banks and insurance companies, except for DSB Bank. And when 2010 entered, most financial organizations were already ‘healthy’ again.

It is true, some non-financial companies – especially in the manufacturing and building & construction industry – had a very tough time too, but most companies suffered only minor losses or still had some kind of profit. To help troubled companies, the Dutch government created the part-time unemployment benefit (P.U.B; check out the link for more information). This P.U.B was deployed in order to supply the companies-in-need with a 50% subsidy on salary costs, with the purpose of keeping employees at the company that temporary ran out of work.

But further, the crisis didn’t feel like a true crisis, as it seemed to be over before it really began. The large banks – the main customers of my company – laid off consultants when budgets were halted (mid-2009), to hire them back only a few months later when the budget was released again.

Most consultancy assignments that my firm got in 2009, were mostly for a few months up to a half year. And although there was some pressure on the prices, the rates were still sufficient to minimize losses or even make a small profit. Although a few consultancy companies came into deep trouble, most survived effortlessly. And then at the end of 2009, everything seemed to be fine again.

But during the last six months of 2010 and the first 7 months of 2011, there were two clear trends:

• Large consultancy firms, like Logica, Origin and Cap Gemini in The Netherlands, maintained a policy of lowering prices per hour for consultancy. These companies did this under pressure of the large banks and insurance companies. Contracts were bargained for large numbers of consultants and the discounts on the gross hourly rates were enormous. If you were not in on this, you were out!
  
  The remaining rates were hardly sufficient to earn back fixed costs, but were still better than having 25% of the consultants without assignments. Although small consultancy firms sometimes had better deals, due to good personal relations of their consultants, also these firms had to give away 10-15% of their gross price.

• The second, even more disturbing trend was: Consultancy assignments that became shorter and shorter. The number of assignments that had a duration of less than a month was soaring, while a duration in ´good times´ is often at least three months, especially in times when consultants are scarce.
  
  On top of that, it became much harder to continue these assignments. Many assignments really ended after 2-6 weeks. And what were earlier last day prolongations, became (sometimes) even last-minute prolongations, after very hard bargaining and threats by the principal to lay off all consultants if tariffs were not lowered.
  
  Although a consultancy contract is a special kind of temporary contract, the difference with normal temp contracts is quite large. In contrary to a normal flex-worker, a consultant is mostly hired for dedicatedly executing projects, because of his special skills. As a consequence of that, the relation between the consultant and his principal is often much stronger than with a normal temp worker. Therefore in this industry, the extreme short contracts of less than a month are almost unheard of.
  
  You have to consider, that the to do-lists of banks, insurance companies and other financial services organizations, concerning ICT-projects, are currently quite long. This is caused by postponements of ICT-activities in 2008 – 2010 and also by projects like SEPA (Single Euro Payments Area), Basel II + III (banking industry) and Solvency II (insurance industry).
  
  Still, in spite of the large list of projects, hiring consultants for a longer time is often considered too risky.

I think these are tell-tale signs of a rebound of the 2008-2009 crisis. In my opinion this would not be a surprise at all. A few days ago, the Dutch Central Bureau of Statistics showed some data on temporary labor, that are in line with these previous findings:

 

Increase in temporary contracts with prospect of permanent appointment 

More and more employees in the Netherlands have a temporary employment contract that offers the likelihood of a permanent appointment. Most of them are younger employees. In the fast growing care sector, in particular, the number of workers with such a contract has risen considerably in the last 15 years. 

Six percent of temporary employees have prospect of permanent contract 

There were more than 6.3 million employees in the Netherlands in 2010. By far most of them, 85 percent, had a permanent contract with fixed working hours. Another 6 percent had a temporary contract with the prospect of a permanent appointment. This percentage has doubled since 1996.
The remaining 9 percent of employees were flex workers, such as agency and standby workers. This percentage varies according to developments in the economy, and was between 7 and 10 percent from 1996 to 2010.

Employees by type of contract

 More and more 35-54 year-oldsTemporary contracts with the likelihood of a permanent appointment are often seen as a sort of probationary period. Indeed it is often young workers who have these contracts. Six out of ten of employees with such a contract in 2010 were younger than 35, compared with three in ten who had a permanent contract.
The percentage of 35-54 year-olds with a temporary contract and the prospect of a permanent appointment has risen substantially since 1996, however: from 18 percent to 37 percent. 

Employees with permanent contract for fixed working hours1) and with temporary contract and prospect of permanent contract, by age 

 Increase mainly in careThe number of employees with a temporary contract and a prospect of permanent contract increased in the health care and welfare sector in particular. This sector has grown strongly in recent years. Nearly one in five employees with a temporary contract with the prospects of a permanent contract worked in the care sector in 2009. In 1996 the largest group of employees with these contracts was in trade. 

Employees with temporary contract and prospect of permanent contract, by main sectors of industry

Having temporary contracts soaring in normal labor situations, is also a very deflationary signal. In good economic times, good personnel is hard to get. Companies then offer rather fixed contracts to their prospective workers than temporary contracts, in order to bind people to them.

The fact that companies don´t dare to hire people for longer times, points out that companies are afraid that less prosperous times are ahead. Especially, when you consider that the Dutch society is aging at a steady pace, which could lead to a shortage in personnel in the not too distant future.

Because of all the restraining measures that were taken by the Dutch government, the recession of 2008-2009 didn’t cause much pain at Dutch companies. 

Unfortunately, this meant also that the overcapacity in all kinds of industries, was maintained, instead of being taken away. The consequences could be that the coming recession might cause much more pain than the last one, as the challenges are enormous, nowadays: the Euro-crisis, the American debt-crisis and the inflating bubbles in China (real estate) and India, that could lead to socionomical unrest there.

This pain will certainly be felt in the consultancy and temporary labor industry, as these industries are the most vulnerable for peaks and troughs in the labor market and often act like a barometer. 

Especially the combination of lower rates and short-term contracts is killing for these industries, as it means that more people are not working and the working people bring in less money. This wears down the budgets and reserves of these companies.

And that is not a happy perspective.

The worst and the best of politics: Europe, the US and… Norway

Today, I was totally ready to vent my spleen on European politics:

• On the chicken-shit deal for the Greek debt crisis that was negotiated by the countries of the Euro-zone, last week.
• On the fact that the deal that was reached, would not end even one bit of the Euro-zones’ misery and all government leaders acted like it would.
• On the fact that Italy and Spain are again ‘on the road to nowhere’ with their interest rates, like I predicted, as a consequence of the second bullet.
• On the fact that:
• the Dutch government leaders acted like some ‘little pests’ at the school yard and`
• Chancellor Angela Merkel acted like a bad-tempered housewife

 in the weeks before the deal

• On the fact that Europe shows discord and selfishness where unity, solidarity and thoroughness are required.
• On the fact that it’s not: ‘One for all and all for one’, but ‘everyone for themselves and 'God for us all’.
• On the fact that Dutch prime-minister Mark Rutte made a ‘slight error’ of €50 bln, when he addressed the negotiated deal to the Dutch parliament.
• On the fact that Dutch Finance Minister Jan Kees de Jager ‘forgot’ to inform the parliament of the €35 bln in warranties for the European Central Bank ECB: you know, the kind of warranties that never cost the taxpayer money, until they do.
• On the fact that Europe is sold to the voter as a bad second-hand car, instead of as a source for prosperity, peace and friendship.
• On the fact that parties like PVV, Vlaams Belang and the True Finns poison the atmosphere in the political debate.

… and on American politics:

• On the fact that the Tea party serves a kind of undrinkable extract, brewed from what they think is ‘fair politics’ and that they dare to compare themselves with the original Tea party.
• On the fact that the rest of the Republican party doesn’t have the nuts to send them back to their corner, by showing leadership and courage.
• On the fact that the Democratic party pulled the chicken switch on the tax increase.
• On the fact that the current deal is ‘postponing the inevitable until the Presidential elections have been held’.
• On the fact that President Obama seems to be just as much a failure as his predecessor George ‘Dubya’ Bush.
• On the fact that too many Americans are not represented in congress, while they should be in a democracy.
• On the fact that the bottom 50% of  American society has less money than the top 1%
• On the fact that everybody accepts this as a fact of life, instead of as a disgrace to society.
• On the fact that some people think that you can pull the American army out of the 140 countries, where they currently reside and that such an event wouldn’t have consequences for the world; the world that we unfortunately have only one of.
• On the fact that by some  people, pulling back behind their own white picket fence is considered as the solution for all world problems.

I took a sip of the proverbial vinegar and was ready to hit the crap out of the keys on my keyboard.

But before I could do so, I watched the Dutch evening news: it showed a memorial service for the victims of the terrorist attacks at Oslo and Utøya, attended by (a.o.) King Harald of Norway, the Norwegian Prime-Minister Jens Stoltenberg and the chairman of Norwegian parliament.

It didn’t have pathetically optimistic speeches, no outbreaks of rage,  no exaggerated sentiment of unity and no national anthems-sung-by-opera-stars.

What it did have, however: the dignity, candour, true compassion and class that especially Dutch politics, Euro-zone politics in general and American politics are lacking so clearly these days. The same characteristics that were shown by the Norwegian people during the last two weeks.

And I felt a sparkle of hope that politics will turn open the window and look outside to the world: it is still there and it is worth saving.

Today I want to paraphrase a speech from one of the most famous American presidents, JFK:

Today, in a divided world, the proudest boast is 'I am a Norwegian'... All united men, wherever they may live, are citizens of Norway, and, therefore, as a united man, I take pride in the words ' Jeg er en Norsk!'

That's all, folks