The German Economy Tanks, The ECB Throws Gasoline On The Fire, And Eurozone Bailouts Enter Phantasy Land

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Slovenia joined the Eurozone in 2007, went on a borrowing binge that blind bond buyers eagerly made possible, dousing some of its two million people with riches, creating a real estate bubble that has since burst, and driving up its external debt by 110%. And in October, it may go bankrupt, admitted Prime Minister Janez Jansa. Because borrowing binges can last only so long if you can’t print your own money. The sixth Eurozone country, of seventeen, to need a bailout. But it’s just a speck, compared to Spain, which will strain the bailout funds, and Italy, which is too large to get bailed out. The other option is the European Central Bank. Its printing press—the one it is not supposed to have—could easily bail out the once blind but now seeing bondholders. As in all bailouts, workers and taxpayers would get a haircut. And in Germany, the debate itself may tear up the Eurozone—just as its economy is tanking.

New car sales in Germany had been holding up well through June—a miracle in face of the fiasco playing out in the Eurozone’s auto industry. But they caved in July; and instead of miraculously recovering in August, they caved again: down 4.7% from August 2011 and down 8.6% from July. Ominously, sales of medium-heavy and heavy trucks, a thermometer of the business investment climate, fell off a cliff: -18.8% for trucks over 12 metric tons, -15.1% for trucks over 20 tons, and -9.4% for tractors (now down 5% for the year!).

Retail sales, which had been on a roll through May, stalled in June, and skidded in July. Early indications are even worse for August: retailers’ negative sentiment worsened for the fourth month in a row. They suffered from a nasty margin squeeze, given the dual pressures of wholesale price inflation that “increased sharply,” and heavy discounting, as Germans struggle to make ends meet.

And manufacturing, the vaunted engine of the German economy, after a rout in July, was hit by another “deterioration in business conditions” in August. It recorded the fifth month in a row of job losses. And export orders plummeted at the “steepest rate since April 2009.”

Alas, 2009 brings up horrid memories. In the first quarter that year, GDP plunged 3.8% from the fourth quarter of 2008, when it had already plunged 2.1% from the third quarter. Annualized, those two quarters added up to a double-digit collapse in GDP, the worst in the history of the Federal Republic. The German economy, which lives and dies by its exports, was saved not by hard-working Germans or smart managers or a superior system, but by the drunken stimulus frenzy in the US and China. German companies and their suppliers sucked with all their might on a wide variety of programs, from green-energy boondoggles to the cash-for-clunkers fiasco.

But now, without such foreign deus ex machina, Germany’s ability to bail out the Eurozone is more than ever in doubt. So, the ECB’s latest machinations hit fertile ground when they were leaked after ECB President Mario Draghi outlined them to the European Parliament late Monday: buy up Spanish and Italian debt with maturities of up to three years—up from the six to 12 months proposed at his last press conference. It worked. Italian and Spanish yields on two-year debt dropped below 2.8%, down from over 7.5% and 6.9% respectively this summer. Central-bank market manipulation at is best. Crisis solved. In phantasy land. Until reality sets in.

Namely a rift in Germany. Chancellor Angela Merkel and a slew of other politicians support it more or less tacitly. But the Bundesbank is having conniptions; printing money to fund government deficits violates EU treaties that limit the ECB to the single mandate of price stability. It just can’t find, not even between the lines, any traces of a hidden second mandate, such as funding government deficits. Bundesbank President Jens Weidmann—”I cannot see how you can ensure the stability of a monetary union by violating its legal provisions,” he’d said last November—has hardened his attacks on bond buying programs. With broad public support in Germany. And Merkel, who wants to hang on to her job more than anything else, will tread carefully. Yet, if Germany skids into a deep export-driven recession, all bets are off.

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  5 comments for “The German Economy Tanks, The ECB Throws Gasoline On The Fire, And Eurozone Bailouts Enter Phantasy Land

  1. Bill Casso
    Sep 5, 2012 at 3:36 am

    As David Patraus famously said at the start of the 2003 invasion of Iraq. "Tell me how this will end" The same question can be asked by the German taxpayer about the purposed bond buying.

  2. Sep 5, 2012 at 6:36 am

    I think your readers would value watching bill stills video "secrets of oz". This pretty much would solve
    Europe and America's banking disaster .. YOU CAN FIND IT ON YOUTUBE "Secrets of oz "
    Or front page of my website jonkirby2012.wordpress. com
    It killed quite a few of our presidents and the secret is bringing back the greenbacks without debt.
    Something the banksters don't want you to know. Jon

  3. Sep 5, 2012 at 6:06 pm

    There is nothing the ECB can do and Draghi knows it.

    The central bank(s) must lend against collateral. If they lend without collateral or lend against what the market acknowledges to be defective or false collateral, if they re-hypothecate collateral or offer unsecured loans/leverage there is no difference between the ECB and the rest of Europe's insolvent banks who are so because of leverage.

    The ECB has no capital to speak of: for it to leverage itself it would be instantly insolvent. As such there would be no European lender of last resort. Because this state of affairs is becoming more apparent, there are bank runs.

    More ECB easing = more bank runs, out of banks out of countries out of euros ultimately into other currencies … out of currencies altogether into hard assets.

  4. JM
    Sep 7, 2012 at 12:57 am

    Steve from Virgina: I don't understand your comment. Who do you think prints euros? With the new OMT regime (much like the SMP) why do they make representations of its "sterilization" if they aren't the competent party? In other words, how would they withdraw the money supply in proportion to novel loans to, say, Spain in the coming weeks?

    For our host: I'm curious- do you think Merkel is looking for the court to declare the whole enterprise unconstitutional to wash her hands, or do you think she perceives greater losses in EMU breakup and resulting appreciation of a NeueDeutscheMark?

  5. Wolf Richter
    Sep 8, 2012 at 3:24 pm

    JM: Merkel is THE consummate politician. I think she is trying to figure out how to create a US of Europe or something like it, regardless of what the costs would be for Germany, or anyone else. She'd have a good chance of being at the top, or at least being a power broker behind the scenes.

    As far as the Court decision is concerned, we'll find out on Sep 12. I see evidence that the ECB, German politicians, and others are preparing for a NO. They want to be ready, in case the Court blows up the ESM. I think the ECB announcement on Thursday of its planned bond buying operations was one of those preparatory steps.

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