Götterdämmerung threatens in the eurozone
BRUSSELS, we have a problem. The Middle East might be in turmoil but that is hardly a surprise. What has come as a shock is news that the German economy contracted by 0.2 per cent in the second quarter. The eurozone’s principal economic locomotive is now shunting into reverse, pulling the other carriages with it. After two successive quarters of decline, France is in a full-blown recession. Ditto Italy, where output is down 9 per cent down from peak and the housing market has imploded.
One might think that with the eurozone’s three biggest economies contracting simultaneously we might get some sense out of Berlin. Not so. Economy minister Sigmar Gabriel blamed the downturn on the unusually mild winter in Germany. According to Gabriel, the contraction resulted because the German construction industry did not enjoy its normal second quarter recovery.
Cue more nonsense from the Bundesbank, which used the bad news to reiterate its view that monetary policy “should not aim to weaken the euro”. That is code for keeping interest rates up and pressing on with austerity regardless. This warning was designed to stiffen resistance in the European Central Bank (ECB) to pressure from France demanding that the ECB starts printing euros (aka quantitative easing) on the pattern of the profligate Anglo-Saxons. The Bundesbank has been rattled by tough talk from Michel Sapin, the French finance minister, who declared: “I refuse to raise taxes to close any budget gaps”.
Not that austerity lacks economic advantages on occasion. Exporters in the battered Spanish economy are happily undercutting domestic suppliers in neighbouring France – which may explain Sapin’s ils ne passeront pas.
This week’s ZEW index of economic sentiment in Germany dropped like a barometer before a storm. That storm is the further harm sanctions against Moscow will do to German exports. German bond yields are falling through the floor, as a result. Eurozone stagnation here we come – unless the ECB has the guts to tell the Bundesbank where to go. leum prices have dropped in recent weeks, despite the proclamation of the Islamic State in the Levant, never mind the threat of Western sanctions against Russia, the world’s biggest oil producer. On Tuesday, the International Energy Agency commented: “Oil prices seem almost eerily calm in the face of mounting geopolitical risks spanning an unusually large swathe of the oilproducing world.”
The explanation is trite: everyone is pumping more oil as fast as they can, in a bid to create an artificial sense of calm. It can’t last. The big oil companies are borrowing on an unprecedented scale to cover costs, while still paying huge dividends. Result: net corporate debt has surged by circa $106 billion (£64bn) in the year to March. And the OBR thinks oil prices are going to stay low?