Euro Area


AfD Wins Big In Another Two German State Elections

We recently pointed out that Germany’s EU-skeptic AfD party has the potential to become a serious political force (see “22% Can Imagine Voting for the AfD” for details). Over the weekend, two further German state elections in Thuringia and Brandenburg confirmed this assessment. In both elections, the AfD was by far the biggest winner, going from zero to 10.6% of the vote in Thuringia and from zero to 12.2% in Brandenburg. We prefer to refer to the party as EU-skeptic rather than simply “euro-skeptic”, although the latter is the label most often used in the mainstream press. While the euro-area’s sovereign debt crisis was the main motivation for the party’s establishment, its ideas had already come in favor among a growing number of people before the crisis. There merely was no party-political platform available to them previously – now there is.

Once again the Free Democratic Party was essentially wiped out in both states (which we believe is unfortunate), but the AfD also seems to have attracted voters from the left – from the Left Party in Brandenburg and the SPD (social democrats) in Thuringia. This is an interesting development, as the party is certainly not leftist in its outlook.

Although the party has gained a respectable percentage of the vote – beating e.g. the Green Party handily – it will be spared from taking part in a coalition government, as majority governments can be formed in both states without its participation and the establishment refuses to have anything to do with the AfD. We say “it will be spared” because experience has shown that being the junior partner in coalition can be deadly. The junior partner as a rule loses much of its base, which tends to be unhappy with the compromises that need to be made in order to join a governing coalition. The opposition role by contrast allows for the party’s stance to be pursued with the same undiluted vigor as before. Voters often see participation in coalitions simply as a way to gain well-remunerated posts by essentially selling out.


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It Wasn't Always Easy …

“What’s the secret?”  We had decided to put the question directly. Why not? How often do you have dinner with a Rothschild, much less dozens of them? 

Today, one of Bordeaux’s most notable winemakers goes to her grave. Philippine de Rothschild was already stone cold when we arrived in town on Saturday; she died last week at 80. Today, she will be buried. 

But we came not to bury a Rothschild, but to praise one. That is to say we came not for an unhappy occasion, but for a happy one: the marriage of one of Philippine’s cousins. 

“She was so loved and respected in the wine industry here in Bordeaux,” a relative reported, “that the other winegrowers, merchants, and even the field hands lined the road and took off their hats when they brought her body back from Paris.” 

Philippine told the French leftist newspaper Libération that, despite the family name and the family fortune, she had not always had an easy time of it. During World War II, being a Rothschild in France was hazardous. Philippine’s mother was sent to a concentration camp near Berlin, where she was murdered in 1945. 

Philippine used her mother’s maiden name, escaped the deportations and, after the war, she went onstage in Paris as Philippine Pascal. Then in 1988, her father died. And she came back to Bordeaux to run the famous Château Mouton Rothschild wine estate. 


James_Mayer_de_Rothschild_by_Southworth__Hawes-231x300James Meyer de Rothchild


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Comprehensive Assessment Paranoia

The ECB is currently busy stress-testing all “systemically relevant” banks in the euro area, the supervision of which it is going to take over as part of the banking union plan later this year. This stress test has given birth to new acronyms, such as “AQR” (asset quality review) and “CA” (comprehensive assessment). Banks that are found to be short of sufficient tier 1 capital will have to submit a credible  recapitalization plan very quickly after the CA has been concluded, and thereafter will have several months to implement it. 

As a result of the massive carry trade in government bonds of the periphery initiated by the LTROs and Draghi's OMT promise (as we have previously mentioned, the timing and sequence of events suggests that there were sub-rosa agreements between governments, the ECB and large commercial banks, with the caveat that this is impossible to prove), a number of bank balance sheets in countries like Spain and Italy probably look significantly improved  simply due to their vast accumulation of zero risk-weighted government debt. Moreover, the ECB's war on savers has clearly served as a redistributive device in favor of banks.

Nevertheless, the recent downfall of the Espirito Santo empire including the bank (Banco Espirito Santo) of the same name in Portugal, was a reminder that there may still be skeletons in a number of closets (an interesting backgrounder on the Espirito Santo affair can be found here by the way). A recent report in the NYT's dealbook suggests that there is a growing consensus that the ECB's stress test will discover many a bank balance sheet falling significantly short.  The Texas ratio has emerged as the analytical tool of choice for guessing which banks will be found wanting:


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Angry Young Roofers

It is another cool, cloudy day in Poitou. The whole summer has been like this – like a winter in Georgia, with hardly a single warm day. Vacationers head back to Paris with the same white skin they came with. Beach resorts empty out… embarrassed at the way they treated their loyal customers.

But the roofers have liked it. No hot sun has beat down on them. We are redoing the roof of one of the barns. Alas, it is a slate roof, which costs a fortune. But at least you only have to replace it once a generation. Slate roofs last for 60 to 70 years.



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Montebourg Gives a Speech – to Unexpected Effect

It all started harmless enough. The economically illiterate French “industrial renewal” minister Arnaud Mounteba…sorry, Montebourg, delivered one of his usual fiery addresses on the alleged evils of non-existent “austerity” imposed by the stingy and small-minded Germanic tribes across the river Rhine.

As a brief reminder: France's economy has entered a downward spiral as a result of its sclerotic body of regulations, overly high taxation and the imposition of a quasi-Zwangswirtschaft by president Hollande and his socialist buddies. As a result, the country continues to be unable to deliver on its promises with respect to the EU's stability pact, the rules of which were tightened in reaction to the euro area's sovereign debt crisis.

Here is what Montebourg had to say:


“The time has come for France to resist Germany's "obsession" with austerity and promote alternative policies across the euro zone that support household consumption, firebrand French Economy Minister Arnaud Montebourg said on Sunday.

Deficit-reduction measures carried out since the 2008 financial crisis have crippled Europe's economies and governments need to change course swiftly or they will lose their voters to populist and extremist parties, Montebourg told a socialists' meeting in eastern France.

"France is the euro zone's second-biggest economy, the world's fifth-greatest power, and it does not intend to align itself, ladies and gentlemen, with the excessive obsessions of Germany's conservatives," Montebourg said. "That is why the time has come for France and its government, in the name of the European Union's survival, to put up a just and sane resistance [to these policies]."

Montebourg said consensus was growing among economists and politicians worldwide on the need for growth-oriented policies and mentioned his German socialist counterpart Sigmar Gabriel and Italy's premier Matteo Renzi as potential allies. He cited former president Charles de Gaulle and former British prime minister Margaret Thatcher as having effectively spoken up to change the course of EU policies they opposed.

Montebourg said he had personally asked President Francois Hollande for "a major re-direction of our economic policy". The government should now focus less on cutting debt than on supporting households to revive consumption, a traditional economic driver, he said.

Montebourg, who makes no secret of his own presidential ambitions, is known for his frequent attacks on austerity, but his latest comments are likely to embarrass Hollande, who despite mounting pressure said just days earlier he would not back away from his policy based on spending cuts and corporate tax breaks.

Hollande's business-minded policies have alienated many left-wing lawmakers and voters already frustrated with his failed pledge to curb unemployment. He is now the most unpopular president in over half a century, with an approval score of 17 percent in the latest Ifop poll.

Hollande's office declined to comment on what Montebourg said. A source close to Prime Minister Manuel Valls said Montebourg had gone too far.


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When One Central Bank Slows its Destructive Policies, Another Must Step Into the Breach …

We could call this the summary of Lorenzo Bini Smaghi's views, who frets in a recent FT editorial about the effects the Fed's decision to 'taper' its 'QE' operations may have on the moribund euro area economy.

In about two thirds of the editorial, Bini Smaghi lists the ways in which a slowdown in monetary largesse across the pond might impact financial markets in Europe. There is nothing wrong with this analysis, in fact, a similar impact will likely also be felt in the US and elsewhere. After burdening the economy with the biggest money printing and deficit spending orgy in post WW2 history, we must expect all the economic errors these policies have induced to become visible as soon as the inflationary policy is actually slowed down sufficiently.

However, the problem is that Bini Smaghi thinks that therefore, we need more of the same, only this time, the ECB is supposed to take upon itself the role of chief money printer. Naturally, there is not a single word about the causes of the last crisis, which was caused by a boom triggered by the very same loose monetary policies Smaghi once again supports. Smaghi not only thinks the ECB should print money in reaction to the turbulence the Fed's tapering may cause, but it should do so “preemptively”.

An excerpt:


“The only way to avoid such a scenario is for the ECB to counteract the restrictive effects produced by the combination of a US monetary tightening and renewed market turbulence. The measures announced so far do not seem to be sufficient, as their effectiveness largely relies on the prevailing demand for bank financing coming from European companies, which currently seem to have little incentive to invest and still need to deleverage. The ECB’s balance sheet might thus continue to shrink, while the economic recovery slows down. Forward guidance, which aims primarily at short-term policy rates, may lose credibility as it is unable to prevent the rise in long-term rates.”


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Loans to the Private Sector Keep Declining, Money Supply Growth Slows

We want to briefly update the most important credit and monetary data of the euro area, which we last briefly discussed in March (see: “Overview of Recent Monetary Trends”, which focused however more on the US than on Europe).

In spite of the ECB cutting interest rates to the bone and offering new “targeted long term refinancing operations” to banks (see “European Credit Dirigisme” for background information), neither lending to the private sector nor money supply growth have so far picked up in the euro area as a whole (there are of course differences between the individual member nations).

Generally we would regard this as a positive development, insofar as it should help to minimize capital malinvestment. Unfortunately, we can infer from the fact that money supply growth remains in positive territory, that lending to the private sector has been replaced with lending to governments, so the economy continues to be exposed to the burden of deficit spending by governments. This is probably not particularly surprising, but we would be remiss not to mention it.

Below we show three charts, consumer credit, loans to non-financial corporations and the euro area's true money supply (currency plus demand deposits). The red lines show the absolute numbers in millions of euro, the blue lines show the annual rate of change in percent.


chart-1-Euro area consumer credit

Consumer credit has taken a dive, and the slump has recently slightly accelerated again – click to enlarge.


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Europe's Cage is Rattled a Bit

The little disturbance in Portugal's banking landscape hasn't been entirely overcome yet. New management has been installed at Banco Espirito Santo, but the problem is that the bank apparently sits on quite a few dubious assets, and the new management cannot wish them away. BES appears to have sunk a lot of money into former Portuguese colony Angola, and these loans are the subject of growing concern. On Tuesday, the stock of BES collapsed to a new low, but the losses have been recovered in Wednesday's trading session.

In parallel with the still growing worries about BES, Germany's ZEW institute issued its economic confidence indicator, which showed the 7th monthly decline in a row. Wasn't there supposed to be a recovery?

A few excerpts from a Reuters summary:


“European stocks and the euro fell on Tuesday after shares in Portugal's biggest listed bank hit a record low, while a plunge in German economic sentiment pushed up borrowing costs for some peripheral euro zone countries.

Global stock markets have recently been supported by dovish policy measures from major central banks and signs that economies are recovering, though worries persist over the pace of growth in Europe and the health of the region's banks.


The banking sector was a sharp underperformer, with Portugal's Banco Espirito Santo  slumping 17.5 percent to a fresh record low. Traders blamed concerns over the bank's Angolan loan portfolio and the sale of a stake at a low price by the bank's founding family on Monday.


"The key takeaway is that the banking sector globally continues to struggle despite time having been bought, and policy being tremendously supportive," said Jeremy Batstone-Carr, head of private client research at Charles Stanley.

"The sector feels like a minefield."


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Mr. Draghi Regrets His Inability to Debase the Currency

Mario Draghi has managed to talk the bonds of completely insolvent governments up, merely by making vague promises of doing something that sounded somewhat dodgy, even illegal. Since he never actually had to keep his promise, this must surely count as an astonishing feat in central banking history.

Convinced of his power to move markets by mere utterances, he is lately engaging in what superficially appears to be a far easier task for a central banker,  namely trying to talk down the currency the bank is issuing. Given that there is no theoretical limit to how much of its confetti a central bank can create, this should be a piece of cake. In a way this is however really a head-scratcher. Hasn't said currency only just recently come out of intensive care? We still happen to remember news magazine covers like these:


100507 NewsweekEuropeanEditionNewsweek times an interim low in the euro …


Newsweek-juny_ARAIMA20120614_0059_1And another one …


end-of-euro-economistThe Economist didn't want to be left out (perfect timing here as well)


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French Labor Bureaucracy to Measure the Pain of Work


I wish we could get into that painfulness stuff.

– One luggage handler to another, overheard in the airport in Paris



Tobacco field

(Photo via Wikimedia Commons)


Today, exceptionally, we write about something we know something about: painfulness. This is our translation of a new concept in French labor law. It involves something called “la pénibilité,” which refers to the difficulty, suffering or pain, involved in a job.

Sitting at a desk in an air-conditioned office involves little or no pénibilité. Carrying heavy roof tiles up a steep ladder in the rain, by contrast, involves quite a bit. In typical French fashion, the labor bureaucracy has set out to make adjustments. Pénibilité is measured. Then it is compensated. Each worker has his own account, in which he gets credits, depending on how painful his work is.

Get 10 points in your account, and you get to retire three months early. Factors contributing to painfulness include: noise, night work, bending, kneeling, crouching, carrying heavy burdens, smoke and so forth. If you get two of these factors working for you, your points are doubled. This system is scheduled to begin in 2015.


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Portuguese Banking Group's Woes Deepen

When we wrote about the troubles at Banco Espirito Santo yesterday (our post was written before European markets opened) information was still fairly scant. However, on the very same day the situation continued to escalate. Here is an excerpt from the WSJ providing further details:


Shares in the troubled Portuguese lender have been under pressure since May, when the bank disclosed that an audit ordered by Bank of Portugal into Espírito Santo International SA, the conglomerate that indirectly holds a stake in the bank, had found Espírito Santo International was in a "serious financial condition" and had uncovered accounting irregularities. But the declines mounted drastically Thursday after investors learned Espírito Santo International had delayed coupon payments relating to some short-term debt securities.

Switzerland-based Banque Privee Espírito Santo SA, which is owned by Espírito Santo Financial Group, said in an emailed statement Wednesday that Espírito Santo International has delayed the repayment of short-term debt sold to some of its clients. It said the repayment is the sole responsibility of the conglomerate. The conglomerate declined to offer a separate comment.

The bank's stock dropped more than 17% before trading in its shares was suspended. Trading in Banco Espirito Santo's controlling shareholder, Espirito Santo Financial Group SA, listed in Luxembourg and Lisbon, was also suspended earlier Thursday. The Portuguese markets regulator banned short selling, or betting against, Banco Espirito Santo shares in Friday's session.



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Breaking From the Wedge

France is currently Europe's “sick man”, not least due to the destructive economic policies pursued by its socialist government. Halfhearted attempts at reform have so far not achieved any notable change, precisely because they are going nowhere near far enough. President Hollande seems to be waiting for the recovery in the rest of Europe to bail him out. His willingness to look beyond leftist dogma and display political courage seems rather limited, which we have always attributed to his fear of being challenged from elements even further to the left, both in his own party and outside of it. However, it is probably more than that: he is a true believer, and is suffering from the delusion that governments can suspend economic laws by fiat. This delusion is of course shared by central planners all across the so-called capitalist world, but it is especially pronounced in his case.

A friend just pointed out to us that France's stock market suddenly looks rather wobbly. French stocks rallied strongly along with other European stock markets once fears over the sovereign debt crisis receded. As we have discussed previously in these pages, year-on-year true money supply growth in the euro area surged strongly from its late 2011 low near 1%, to a high slightly above 8% in early 2013, and has since then begun to decline noticeably again (see our assessment of Europe's tepid economic recovery from mid May: Europe’s Recovery is Stuck in the Mud. A chart of the euro area's true money supply and its annualized growth rate can be seen here). The money supply growth rate is still fairly high at present, but the trend is down and one cannot tell in advance what level will be the threshold that triggers the next bust. However, it would certainly make sense if France's stock market were to lead other European markets at the turning point.

There is a chance that such a turning point may have arrived. Of course, this isn't the first time European stocks are correcting since their uptrend started, and one can never be certain whether short term moves really have significance for the larger degree trend. France's stock market is acting worse in the recent correction than other European markets, but we thank that may well be because it is  leading them.

The character of the recent correction seems different from that of previous short term downturns, even though its extent is not yet unusual. Contrary to previous dips, the market has put in a second lower high on the daily chart. The move has moreover clearly violated the lower boundary of the preceding wedge-like advance. The last rebound attempt didn't even manage to move the CAC-40 index back to the broken trend line for a “good-bye kiss”, which we believe is a strong sign that something is amiss.


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“Good Riddance, Rich Bastard”

We have actually discussed the flight of the best and brightest (as well as the  richest) citizens from president Hollande's socialist paradise before – see  “Regime Uncertainty in France” for details. We have just come across the video below, which is also slightly dated by now, but since nothing much has changed in France, it is worth reviewing it.

Anne-Elisabeth Moutet, the London journalist (born in France, and now living in France's six-largest city, far away from the clutches of Hollande and Mountebank) is interviewed in the video as well.  As she points out, when France's richest man decided he would rather leave than keep feeding Leviathan, the French press reacted with the headline “good riddance, rich bastard”.

The anti-capitalist mentality is deeply rooted in France, which leads even to escapades such as unions kidnapping and blackmailing managers.  They have nothing to fear – for some reason it is apparently considered perfectly legal when unions do this. This is not to say that there are actually legal exceptions in the statutes regarding kidnapping and blackmail by unions or workers, but they are simply never prosecuted for it. On the contrary – they get gifts from the courts! As Business Week reported:


“Bossnapping” and similar tactics have turned out to be pretty effective negotiating tools for French labor unions. Workers who have participated in past hostage-taking incidents haven’t been prosecuted, and most have won sizable concessions from employers.

After four executives of Caterpillar (CAT) were held hostage in 2009 for 24 hours to protest layoffs in Grenoble, the company upped its total severance package from €48.5 million to €50 million, amounting to an average €80,000 ($108,000) per worker. The same year, appliance maker Ariston (A3E:GR) agreed to severance packages of up to €90,000 for workers at a factory in Brittany who protested planned layoffs by locking the manager out of the building.

In still another case—among a spate of 10 French “bossnappings” in 2009—the manager of a 3M (MMM) factory in the town of Pithiviers was taken hostage in a dispute over severance pay. The workers served him a takeout meal of mussels and French fries before deciding to let him go and pursue their grievances in court. An appeals court ruled in their favor last July, ordering 3M to pay €800,000 to 110 laid-off workers.

Former President Nicolas Sarkozy denounced the hostage-taking, but public opinion polls showed that many French sympathized with the protesters and no charges have ever been filed against them.”


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Dysfunctional Bond Markets – A Comparison of Yields

Below we show the 10 year government bond yields of three countries: Spain, Japan and the United States. Also shown are budget deficits and total public debt as a percentage of GDP. It would actually make more sense to look at deficits as a percentage of tax revenues. The comparison of debt to GDP seems not to make a lot of sense intuitively, as governments cannot pay their debts out of 'GDP', but only out of tax revenues (note also that there are slight differences in the GDP calculations).

Anyway, the point is mainly to compare the three countries, as both Spain's and Japan's bond yields essentially reflect zero risk at this point. In fact, investors seem to assume that the combination of inflation risk and default risk in Spain and Japan is lower than in the US, which strikes us as slightly absurd, if only for “technical” reasons. An overview of annual CPI rates of change is shown as well.  Also included above the bond yield charts are the credit ratings assigned by the three big credit rating agencies (in this order: S&P, Moody's, Fitch).


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Elections to European Parliament Create 'Political Earthquake'

Parties skeptical of the EU have made large inroads into the European parliament this week, but they haven't won enough seats to seriously derail the Brussels machinery. What's more, there are significant ideological and political differences between the various parties that make up the euro-skeptical hodgepodge.

Among the most successful ones in the recent election we find Nigel Farage's UKIP, which apart from its anti-immigration stance appears to have a fairly strong libertarian bent, the Front National (FN) in France, which is essentially a nationalist socialist party (mind, we are not trying to say they are 'Nazis', only that their program is both nationalistic and socialistic), and Syriza in Greece, which is an alliance of far-left movements. Somehow we don't see Nigel Farage having much in common with Alexis Tsipras.

Beppe Grillo's Five Star moment took 21% of the vote in Italy, but fell a bit short of expectations. In Spain, the new Podemos party received 8% of the vote, while the established parties all lost about one third relative to the last EU election. Even in Germany, where the established parties retained a comfortable  majority, the euro-skeptic AfD scored a respectable 7%.

Naturally, no-one was surprised by Syriza's victory, which was foreshadowed by polls in Greece ever since the ND-PASOK coalition took power. The success of UKIP in the UK and the FN in France wasn't a surprise as such either, but the extent of their success certainly was. Marine Le Pen's FN bulldozed not only France's establishment parties, it also seems to have taken votes from the far-left led by Jean-Luc Mélenchon. Voters humiliated Francois Hollande's government by delivering a stern rebuke; the socialists landed only in distant third place. A brief summary of the election outcome in France:


“Marine Le Pen unleashed a political earthquake in France on Sunday night, after her National Front party topped the poll in the European elections.

With the polls closed, exit polls indicated that Le Pen's National Front party had won its first ever nation-wide election, with 25 percent of the vote, electing 25 of France's 74 MEPs. Following the vote, Le Pen immediately called for President Francois Hollande to dissolve the French parliament and call fresh elections.

Hollande's governing Socialist party received a drubbing from voters, picking up just 15 percent. Meanwhile, the centre-right UMP, traditionally the dominant force in French politics, also fared poorly, securing 20 percent.

Elsewhere, the liberal Movement for Democracy party claimed 10 percent of the vote, followed by the Greens on 9 percent, and Jean-Luc Melanchon's Left Front taking a mere 6 percent. The

(emphasis added)


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