Courtesy of Mike Shedlock

“Robust growth in Q3 will soon give way in Europe. Markit reports Eurozone recovery slows as renewed contraction is evident outside of French-German core

Contracting periphery

Outside of the two largest euro member states, a renewed contraction of economic activity was evident in September. The Composite Output Index for the rest of the Eurozone1 has fallen steadily since peaking at 54.2 in March, dropping from 51.7 in August to 49.4 to thereby slip below the 50.0 no-change level for the first time since last November.

Employment growth disappoints

One of the more disappointing aspects of the recovery has been weak job creation. The Composite PMI Employment Index fell slightly in September, down from its weak post-recession peak in August, and is consistent with only very modest employment growth of perhaps 0.2% per quarter.

Furthermore, the jobs growth is largely confined to France and Germany. The former saw jobs created at a rate only just below August’s 28-month high, while the latter saw the sharpest rise in employment since May 2008. In contrast, outside of these countries, PMI data signalled an accelerating rate of job losses in September, with the rate of decline reaching the highest since February.

How long Germany and France can keep Europe from slipping back into recession remains to be seen, but if contraction of economic activity in the rest of Europe continues, I would suggest another quarter or two at most.

One big advantage German exporters had earlier in the year was the Euro collapsed to 1.18. The Euro is now approaching 1.35.

Meanwhile, Japan’s intervention in the Yen has failed to produce any lasting results, as expected.

Trade Friction Increases

Congress and Geithner are on the warpath over currencies already. Moreover, the House is set to vote on Tariff legislation this week, as discussed in Prepare for Currency/Trade Wars; How Might China Respond to US Tariffs?

Yet, without waiting to see whether or not the House and Senate pass a bill, China has fired off a preemptive warning. MarketWatch reports China raises antidumping duties on U.S. chicken

China’s Commerce Ministry has decided to increase an antidumping duty on U.S. chicken products, months after the punitive measures were first introduced, in a sign of continuing trade frictions between the two economic superpowers.

China will raise the minimum chicken duty to 50.3% on chicken products imported from the U.S., compared with minimum duties of 43.1% that were introduced in February, the ministry reportedly said in a statement on Sunday. The maximum antidumping tariff for the chicken products will remain at 105.4%, reports said.

Global Trade War Risks Increase

With US and China openly bickering, and with the US House of Representatives prepared to act, risk of a global trade war is increasing by the day. I do not think China’s chicken move will help any.

Every country wants its currency to weaken to stimulate exports. However, that’s mathematically impossible except against gold, and rising gold prices will not do exporters any good.

Hopefully cooler heads will prevail, but now that Geithner has stirred up a hornet’s nest, anything can happen.”

Bismarck’s Strategy Has Reached Its Limit

September 9, 2010
By John R. Taylor, Jr.
Chief Investment Officer, F/X Concepts

“In the 1880’s, Otto von Bismarck, Chancellor of Germany, instituted a series of revolutionary and very generous social reforms in a successful attempt to weaken the growing political appeal of the Social Democrats. His strategy was such a success that it not only allowed him to maintain control of the volatile German political landscape for a few more years, but also became the social welfare  model for the rapidly democratizing Europe. By giving the rapidly growing working classes a far better deal that allowed them to receive a decent wage with retirement benefits and health care, Bismarck neutralized the powerful Socialist and Communist threat that looked as though it might force him from power.

Looking back at the development of the European democratic system, it is clear that Bismarck’s tactic, designed to take the wind out of the Social Democrats’ sails almost 130 years ago, laid the groundwork for several different more-or-less successful political systems that continue to operate throughout the continent today. What makes these systems different than that of the United States is the  entrenched power of the European economic and social elite and the generous social benefits offered to those who (in US terms) have no economic or political power. The US system is its opposite: more open to economic and social outsiders, allowing for more  dynamism within the power structure, but lacking a decent social safety net. Although the differences between the two democratic  systems have blurred in the last few decades and can be overblown, the US still offers many fewer entitlements and more mobility  while Europe offers substantial entitlements and much less social mobility.

From a long-term point of view, Europe’s system is threatened by two intertwined problems: many countries are unable to pay the  future level of entitlements that the Bismarck strategy demands, and the pan-European structure created by the political and economic elite can only be maintained if the high level of entitlements and economic security promised by Bismarck is continued. The debt load of almost all member states and the expansion of the European Union to countries with lower standards of living are issues today, but the problems are much deeper and will continue to expand. Although statistics can be confusing and lead to incorrect conclusions, in this case the projections of future population growth and the current economic positions of the vast majority of the EU countries have such negative implications that it is hard to draw any positive scenarios for the Continent. If all Europe could take the lead of modern Germany as an export powerhouse, selling very high value-added products to the rest of the world and building up a tremendous global net-asset position, there might be a way to pay the entitlements when the dependency ratio closes in on 1.0 about 40 years from now. Or if Europe discovered a Saudi Arabian sized pool of oil under the Mediterranean, or, more likely, a rare earth play that allowed it to hold the dominant position that China does today, then these would work. The nationwide strikes in France yesterday, protesting the increase in the retirement age from 60 to 62, and the targeted ones in Greece this week, are symptoms of Europe’s more likely course – a rolling cut back in entitlements. As a 67 year-old American writing this evening (in overtime), I find it easy to say “just do it,” raise the retirement age and cut social benefits, but my knowledge of politics and societies tells me that the process will be very difficult and fraught with political struggle and turmoil. Unless a miracle takes place, the Greek situation will deteriorate and other countries will follow in the next few years. Although it is hard to forecast currency movements years into the future, one thing is obvious: the euro, as it is structured today, is not the currency to replace the dollar.”