Tyndall Monthly Commentary: Eurozone crisis far from over

Over recent months, there has been a rush amongst politicians and even in the press to once again proclaim that the Euro Crisis is over.  This latest bout of optimism has been based primarily on the fact that bond “spreads” between the debt markets of the periphery and the core countries of Europe have narrowed substantially over recent months.  Particularly since the European Central Bank’s Chairman, M. Draghi, overrode some of the concerns of his own board members and advisors and announced that he would do whatever was necessary to save the Euro – including “unlimited asset purchases”. 

In fact, we find that M. Draghi and his newly revived ECB has not had to do very much since his now-famous verbal intervention on the way to his guest seats at the Olympics in London; his words have apparently been enough on their own to lead foreign investors to commit record amounts to the peripheral Eurozone government bond markets with the result that bond prices in these countries have rallied without the need for ECB physical intervention.  The ECB has found that it has needed to lend less rather than more to the periphery and its banking systems and financial markets in general have come to view the Eurozone economies as being on the road to recovery.

Unfortunately, we can see little to justify the surprisingly common view that the Eurozone crisis is now over and that the economies are somehow on the road to recovery.  For example, even within the supposedly strong man of Europe, Germany, we find that although the rather subjective business confidence indices (as measured by the widely watched ifo and PMI surveys) have generally picked up, the actual production, income and spending data has remained very weak.   Admittedly, the domestic industrial orders data did pick up in Germany last month but we find that this was primarily due to a one-time surge in orders for electricity generating equipment that was associated with the building of a new power generation plant – not something that happens every month.  Excluding this “special factor”, German trends in general remain very weak: industrial production has fallen by 1.9% over the last three months, German household disposable incomes and borrowing are falling in real inflation-adjusted terms and, most worryingly of all, we find that retail expenditure has fallen at a 6% annualised rate over the last three months in volume terms.