As you may have noticed the news is a bit slow out of Europe recently. It is the holiday season in which the Euro-elite pack-up and head to the beaches for some R&R. Angela Merkel returned from her break yesterday so over the next week or so we should start to see some clarity around exactly what her government has to say about Mario Draghi’s master plan.
As you may be aware, the plan hinges on Spain and Italy requesting bailouts to ensure that they are legally bound to implement fiscal reforms while the ECB provides a backstop in the secondary sovereign bond market. Obviously none of this has occurred yet , and much of it can’t until the German constutional court decides on the legaility of the ESM in September, so it was no surprise that for the 22nd week in a row the ECB has reported that its total Securities Market Program purchases were €0.
In the meantime the focus is back on Greece where the Troika has been visiting once again. The country still appears to be having troubles determining exactly where the additional €10bn requested by the Trokia is going to come from. There is also another marked change in rhetoric from the German camp with a number of politicians stating it is time for the country to leave the Euro and that Germany will veto any new aid unless there has been 100% compliance with previous programs.
The situation in Greece certainly isn’t getting any better with the latest GDP estimate for Q2 coming in at -6.2% YoY. This is up slightly from Q1 but it still very obviously a depression-like contraction. As I mentioned after the last governing council meeting, the ECB has extended Greece’s ELA program in order to support the country in the short term. In the month of July the facility was used to inject €44bn into the banking system which is obviously still seeing capital flight.
Greece, however, isn’t the only nation that continues to struggle. As you may have noticed if you’ve been following the posts on European PMIs, Italy’s manufacturing appears to have fallen off a cliff and that is flowing through to economic growth:
Italy’s economy contracted for a fourth straight quarter in the three months through June as manufacturing slumped and the euro-area debt crisis intensified.
Gross domestic product declined 0.7 percent in the second quarter, Rome-based national statistics institute Istat said in a preliminary report today. The contraction was less than the median forecast for a 0.8 percent decline in a survey of 22 economists by Bloomberg News. GDP fell 2.5 percent from a year earlier, the most since the final quarter of 2009.
But it isn’t just manufacturing where the economic slowdown is becoming obvious. Much like Spain, although not a systemic issue, Italy’s real estate market is also being affected:
The Spanish and Italian commercial property markets have all but collapsed with the number of transactions in both countries falling more than 90 per cent in the three months to July as investors worry about the future of the eurozone.
Only three property transactions were registered in Spain during the second quarter, down from 58 deals in the previous quarter. In Italy the slide was even more pronounced, with just two buildings being traded during the period, down from 56, according to data from Real Capital Analytics.
As I wrote back in July, Italy presents a large political risk for the rest of Europe. Italian unemployment is above 10% and growing monthly and as the Italian economy slides the support for Mario Monti’s technocratic leadership is likely to slide with it. The man himself has already stated he will not continue after the 2013 elections and internal pressure appears to be growing. Just last week Mr Monti was subtly reminded by the Italian parliament that he is only there because the elected members wanted it that way and he was forced to apologise for making disparaging remarks about Silvio Berlusconi’s economic management. Obviously the closer the elections get the more politicised the economic situation will become, and falling GDP and rising unemployment are easy pickings for an anti-European campaign no matter how irrational that may seem.
Mario Monti, however, isn’t the only one taking the political hit for weakening economy. It is the same in Spain:
Support for Rajoy fell sharply after he was forced in June to seek a credit line of up to 100 billion euros to recapitalize Spain’s ailing banks and then announced a new package of spending cuts and tax hikes worth 65 billion euros.
According to an official poll released this week, if a general election were to take place now, Rajoy’s People’s Party would still win but would get only a 36.6 percent of the vote, down from 40.6 percent in a poll in May and 44.6 percent in the November vote.
Hundreds of thousands of angry Spaniards demonstrated in the streets of Spanish cities in July, with civil servants protesting daily for two straight weeks after their pay and perks were cut. New protests are scheduled in August and trade unions say they could call a general strike later this year.
Reflecting the widespread fear among Spaniards that a new bailout would come with tougher conditions attached, labor union leaders asked King Juan Carlos on Tuesday to mediate with the government to organize a referendum if further cuts were to be on the cards.
Both men still have political capital left, but even if both Spain and Italy do get to a point where they request official help the fiscal adjustment requirements under the programs gaurantee falling economic output for years to come. It seems doubtful that either man would survive such an adjustment. In short, I see the political risks of a European backlash rising in both countries.
It’s Q2 GDP estimates for the much of the Europe tonight, given the PMI correlation the numbers are likely to once again disappoint.