Eurozone Pulls Ahead – Two Steps Forward, One Step Back

PMI

The Purchasing Manager’s Index (PMI) shows in figures released today that the Eurozone has an increase in its manufacturing activity. That’s the first time for the past two years that growth has been seen. The PMI increased from June’s figure of 48.8 to 50.3. Some had predicted that it would rise to 50.1 and so the real figure is better than what was expected. The Eurozone has officially gone therefore from contraction to expansion, breaking through the all-important barrier figure of 50. However, the race is far from over and they are nowhere near the finishing line just yet.

Germany’s manufacturing activity (50.7) was the front-runner out of the Eurozone, this was due in the main to domestic demand increases (although exports still declined in July). Out of 17 countries in the Eurozone, Italy (50.4) also had a marginal improvement and France (49.7) saw an increase in its manufacturing activity in comparison with last month’s figure (but the country is still contracting for the moment). However, France’s PMI is the highest it has been for the past year and a half. There was an increase across the Eurozone, except in Spain (49.8), which saw its lowest level for two months. Greece was the worst of the 17-Eurozone members with a figure of 47. However, it should be noted that this is the highest level for Greece for the last 43 months, so there are signs of slight improvement.

This increase means that production and new orders have risen at a quicker rate than at any other time since the middle of 2011.

Unemployment

Unemployment in the Eurozone

Unemployment in the Eurozone

Unemployment has started to decrease (since June) for the first time in a two-year period as shown by data that was released on Wednesday by the EU. Eurostat issued the figures that showed that the EU-27 had 26.424 million people that were unemployed in June 2013. 19.266 million of those were in the Eurozone. That was a decrease on the figure in May by 32 000 in the EU and the Eurozone saw a decrease of 24 000. The overall unemployment figure in percentage terms remained stable at 12.1% between May and June 2013. Now added to the slight, tentative improvement there are the PMI figures for the Eurozone that are an improvement. But, the fact that the figure dropped in terms of a few thousand people might be a welcome sign that things are going to get better. But, the percentage is still a record level and it is stuck for the moment at 12.1% since the numbers are not dropping fast enough.

This will come as a positive boost to the European Central Bank meeting that takesplace today in which monetary policy isreviewed by the Governing Council. However, it iswashighly unlikely that there would be any major changes to that policy given the improvements in PMI and unemployment. Indeed the decisions were that the deadline borrowing rate would remain at 0.5%. The deposit facility rate remained at 0.0% and the marginal lending rate stood unchanged at 1%.

Greek Shortfall

IMF on the Eurozone

IMF on the Eurozone

However, the International Monetary Fund has announced just yesterday that Greece will suffer from an €11-billion shortfall in the bailout program set up by the troika (the EU, the European Central Bank and the International Monetary Fund). The IMF has said that the Eurozone must now try to plug that gap before the end of the year, after making a quarterly assessment of the situation in the Greek economy. It also went on to add that if Greece were going to attain any sort of level of management of its debt, then it would have to be relieved of about €7.4 billion in debt (approximately 4% of economic output) over a two-year period.  As some might have already suspected, the IMF has suggested that Eurozone governments simply have no other choice than to write off some of the Greek debt. The IMF warned that if debt sustainability were a cause for concern for investors, then Eurozone governments would have no other alternative than to incur losses in order to reduce the Greek debt.

Such a suggestion will most certainly result in electoral trouble for the German chancellor, Angela Merkel as she prepares to go to the country in two months in an attempt to be reelected. The failure of the Greek bailout once again has added fuel to the fire and given the opposition to Angela Merkel some new ammunition, stating that she was a major actor in the elaboration of the bailout program for the Greeks.

There will be another shortfall in 2015 amounting to approximately €5.6 billion. The IMF has been trying to talk Eurozone leaders to kill two birds with one stone and provide the money for both shortfalls that are looming in the future.

Conclusion

All in all, the Eurozone has made two steps forward and one step back. They are not quite out of the thick of it yet and there looks as if there will be a lot of negotiating still to do. PMI figures are showing an improvement and unemployment is starting to show the first signs of a reduction. But, the Greek problem is not going to go away and at last the IMF has clearly stated that there is need to write off the debt at least in part if the Greeks are going to be able to manage their debt at all. German spokespeople for the government stated yesterday that there was no need for more debt relief from the Eurozone. There is also the belief (at least officially) in Germany that bailing out the bailout program will undermine the slight improvement in the Eurozone’s economy. Although, if you look at the figures coming out of Greece at the present time, then it is clearly understandable that no government will be able to deal with debt of this level and get back on its feet at the same time.

It is the Eurozone that owns the majority of the Greek debt at the moment and that debt will reach 176% of economic output. It is predicted to only decline to about 124% by 2020.

However, the tentative improvements in the EU should not be taken as a sign that the recession is over already. It is perhaps beginning to come to an end, but it certainly is nowhere near being over.

Whether or not the Eurozone decides to accept the advice of the IMF is another matter.

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tothetick

Professional team of writers/analysts analyzing the financial markets.

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