As good news goes, today’s announcement of first quarter GDP growth in the Euro Zone economies isn’t going to produce dancing in the streets. But good news has been hard to come by in Europe recently so even the smallest positive change is welcome.Â
The economies of the 16 countries that use the euro grew by 0.2% in the quarter from the fourth quarter of 2009. Economists surveyed by Bloomberg News had expected growth of just 0.1%
On a year-to-year basis GDP grew by 0.5% after falling at an annual rate of 2.2% in the fourth quarter.
You didn’t have to look very hard to discover the reason. A cheaper euro made exports less expensive for customers in non-euro countries. And that led to a 1.3% increase in industrial production in March after a 0.7% gain in February. The euro is down 11% against the U.S. dollar so far in 2010.
Unfortunately, growth wasn’t spread evenly across the euro economies.
Growth was strong in the center. In Germany GDP rose 0.2% from the fourth quarter. French GDP climbed 0.1% and Italy recorded 0.5% growth.Â
On the other hand, Greek GDP fell by 0.8% in the first quarter.
But other countries that have been the locus of worry about a wider crisis fell into the growth camp even if just barely. Spain showed 0.1% growth in the quarter from the fourth quarter of 2009. Portuguese GDP climbed by 1%.
Greece lives nowhere near the level of Germans or French. Unstated in all of this debate is that before the Euro became a currency in 1999, the PIIGS had very weak currencies, reasonably high deficits (relative to their northern neighbors), relatively weak economies with reasonably high inflation (because their currencies couldn’t hold their value). As a result, those countries were cheap, cheap cheap. Travellers loved them. Exchanging dollars into drachmas at the official rates allowed a poor college kid to live like a king. Germany was expensive, Switzerland an outrage. Obviously, their currencies were strong and the dollar didn’t buy so many marks and francs.
In 1999 the EURO started trading at 1.17 to a buck and promptly crashed to under 1.00. Look at a chart of the exhchange rates between the dollar and the EURO. At some point it started climbing and never stopped.
I returned to Italy and Switzerland in 2008. Italy had become unbelievably expensive at 1.60 E to a buck. Switzerland was cheaper than Italy- considerably so.
Had the PIIGS’ economies gotten better? Not really. They don’t export any more goods or services outside the EURO zone than they did in 1998. They’re exports got crushed at 1.60E to a buck. They never had a chance.
Now, they get blamed as though the greed of a Greek street sweeper or bus driver is the reason the world’s financial system hangs on a precipice.
Those countries never had a chance to be competitive with German or French or Korean or Japanese or Chinese industrial exporters. SO they sell souvlaki to tourists.
The surprise is not that they could never live within the 3% deficit cap without Goldman’s help cooking their books; it’s that anyone ever thought they could back in 1994 when the Maastricht treaty was hatched. Wishful thinking. Someone profited big time by fooling everyone into thinking the impossible was possible- wonder who that was? It wasn’t the greek trash man I’ll tell you that.
Let them default on their Euro denominated bonds, get them off the EURO, and start fresh. Not just Greece but Spain and Portugal and any other country that is effectively insolvent using the Euro as its currency, with no ability to unilaterally inflate its currency to pay back its debts with cheaper units. Why make the countries that can defend their currencies bail out those that can’t, when the only result is delayed ineveitability and widespread resentment, as shown by the posts on this site?
Basically, let them go bankrupt. Find a court that can administer their creditor’s (i.e., bondholders’) claims in an orderly fashion so bondholders all get the same haircut and start fresh with new currencies. Bring back the LIRA (who remembers when a coke cost a thousand lira?)
Any other sollution is to repeat the same process that’s been undertaken the last 12 years to obviously disasterous effect.
It’s natural people pay a great deal of attention to “debt” or “deficit” now, because the current problems are caused by high debt and deficit. However, low debt or deficit (although a good thing in general) may not reflect the whole picture. For example, what if some poor countries have low debt or deficit not because they are excellent at managing their finance but because none with money would lend to them.
I believe deeper measure should be considered for such union, such as socio-economic development level. What behind the high debt or deficit is the low socio-economic development level in such European countries like Greece. In order for Greece to live at the level of Germany or France without the economic level, what did they do? Borrow.
If I remember correctly, Greece could not qualify to get into EU for long time. When a country tried everything (maybe some creative accounting included as it has been suspected) and finally squeezed in, it will not be easy for them to stay at the level. It may drag the whole thing down as Greece is doing in front of out eyes. (Run26.2 used a better word “be selective”.)
We live in a increasingly inter-related world. Last week’s sell off should at least be a alarm for those who has not waken up that we NEED to know or be concerned about what’s going on, not only HERE but also THERE or any where in the world. Particularly we (the US) paid a lot of money for it.
Poland is on course to join the Euro in 2012,
In my opinion another good entry, low debt and deficit (no bloated welfare state), they will become one of the larger euro economies
yx,
Now you want to know who gets into EU? Estonia is member of EU since 2004, now the issue is completely different – about joining euro zone in 2011.
Christopher… I think the “concern” with Estonia is more how Greece slid (no pun intended) in when they probably should have been left out. Estonia may be worthy of inclusion, but maybe the EU needs be be very selective and not be too agressive in expansion. Now if GS is advising Estonia, I will be very worried.
Sorry to offend people. Make that my lack of knowledge.
I agree. The Timing of buying WHR and CMI are perfect!
Thanks, Jim!
“Buzz” about Estonia into EU? Just ask why Germany is still paying tax to absorb the former East Germany which was the BEST in all the former east European block! Glad that you were saying “lack of knowledge”.
We (the US) better be “prejudiced” about which country got into EU, because we are paying their bailout. $50B so far has been reported in addition to $3.4T bank exposure that NY Times report last weekend. If you have ever gone through a loan process, you should know how “prejudiced” lenders are.
Christopher,
I never said the idea would be politically popular, or even politically possible. However, when the governments can no longer afford to bailout anyone, maybe THEN it can happen.
And the shoe on the other side of the world drops. Has the Chinese real estate bubble already burst?
http://www.cnbc.com/id/37020447
This may be an indicator to pull out of commodities. I am adding stop loss orders to my commodity positions today.
Ed,
“Frankly, we need to let some companies fail in order to get back to a reasonable economic equilibrium.”
So true, but the Japanese couldn’t do it , and the US criticized them for it and that caused their lost “decade” that is now 20 years long. And when the US had its chance and couldn’t do it. And if the US with all its claiming to have a “free enterprise system” who do you think will do it?
Frankly I think the only way people/governments learn this is when it is shoved down their throats or the people revolt.
Here is an intriguing article making the “doom and gloom” case for the world’s economy:
http://www.tnr.com/article/politics/the-case-economic-doom-and-gloom
In summary, the main cause of the world’s present problems is industrial overcapacity. Although the article doesn’t state this example, bailing out GM and Chrysler was a bad idea. Think about it: Could we satisfy the world’s demand for cars without GM and Chrysler? Certainly. So why bail them out?
There are plenty of other industries in a similar situation. Frankly, we need to let some companies fail in order to get back to a reasonable economic equilibrium.
Juris,
The addition of Estonia is not a big deal in and of itself. However, the fact the EU decided to let them in against the advice of the ECB does speak volumes:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=arwdngtX3qo8
However, considering Estonia used to be a Soviet satellite, I suspect this move was a political slap in the face to Russia more than anything else.
P.S.
Thank you Juris for opening my eyes.
Juris,
I think the “buzz” is just showing our lack of knowledge and prejudices. When I glanced at the article I thought about the same as the “buzz” not knowing any better. After your comment I have done a little research on Estonia, and you are correct. Estonia is in a lot better shape then most countries. As a matter of fact it is in a lot better shape then the US.
I find that is interesting that they can vote using the Internet, and that they rank very high in the free press.
Frankly I do not understand this buzz about Estonia. GDP of Estonia in 2009 was about 14 billion euros, and government debt of 7.2% of GDP. No problems for EU at all.
Jim,
Perfect timing on WHR and CMI !
Thanks yet again.
-DJB
jaxle: regarding RIG, I looked hard at it while it fell last week, but did not pull the trigger. Added to my DO instead. Over the weekend I read an article discussing what seemed to be some issues since their buying of Global Sante Fe (hope that’s right). Seems that before they were best performing for safety and post-merger they fell like a rock. Some of the stats seemed like they may have been cherry-picked, but it give me some pause. I’ll see if I can find the original story.
One of the reasons I’ve preferred DO is that they have a regular, though small, dividend, but also have special dividends based on their results.
BTW, what happened to “sell in May and go away”?
It seems one Greece is not enough for EU. It needs dozen more!
Jim:
Someone asked you yesterday if you had become more of a trader than a mid-long term investor. Although I understand your recent buy & sell, I think it’s necessary for you to address this issue. Thanks.
The Greek strikers need to go back to WORK! They are not going to strike their way out of the mess.
I read this morning that EU let in another (economic) low class country. The more they let in, the more screwed EU is and the more Germany need to get out of it.
I figure being an export oriented economy Germany would welcome an depreciating euro. Time to book a vacation in the greek isles this summer 😀
Has the EU learned? They seem to have glossed over some inflation issues to let in Estonia. Here is the official version and the 8 other that are still waiting:
“Six years after it joined the EU, Estonia meets the requirements for adopting the euro.
The commission announced today that it would recommend that EU governments let the country switch to the currency in January next year. Estonia, which currently uses the kroon, would become the 17th nation to adopt the euro.
The announcement was accompanied by a new report showing eight other EU countries do not yet satisfy the conditions for euro area membership – Bulgaria, the Czech Republic, Latvia, Lithuania, Hungary, Poland, Romania and Sweden. The UK and Denmark have opted not to join.
To qualify, candidates must show that their public finances are in good shape and the exchange rate and prices are stable. Their interest rates must also be low, and national legislation on monetary matters must be in line with EU law.
The euro was introduced to world financial markets in 1999. The coins and banknotes went into circulation three years later.
The most recent country to adopt the euro was Slovakia – in 2009. Some 329 million people now use the euro every day, nearly two-thirds of the EU population of about 500 million.”
Ben: perhaps also urns and hair dye.
So Spain cuts $19 billion euros from their budget (a drop in the debt bucket), and the unions already start grumbling?
http://www.cnbc.com/id/37080387
This is going to be an interesting summer in Europe…
I’m guessing Greek strike will involve olives, philosophy and an enormous amount of wrestling
Jim, can you give us your current assessment of RIG?
Next Greek strike scheduled for May 19th. Bring lots of popcorn, because it’s a 24 hour strike.