Meanwhile the economy....

French Industrial Output Tumbles as Recession Looms

Bloomberg,

12 March, 2013

French industrial production fell more than expected in January as Europe’s second-largest economy teetered on the brink of its third recession in four years.

Output from factories, mines and utilities fell 1.2 percent in the month from December, national statistics office Insee said today. Economists had expected a 0.2 percent drop, according the median 25 estimates in a Bloomberg survey.

The decline underlines difficulty President Francois Hollande faces in trying to revive an economy that fell back into recession early last year and shrank again in the fourth quarter. Factory output fell 1.4 percent in January and 4.6 percent in the three months through January, led by a slump in car production.

“France remains stuck in a recessionary mode,” said Philippe Gudin, an economist at Barclays in Paris. “The unemployment rate is flirting with historical highs and household income is hit by higher taxes. The stabilization we had expected from the beginning of 2013 does not seem to have taken place.”

Stocks Fall

European stocks fell from a 4 1/2-year high today. The Stoxx Europe 600 Index (SXXP) dropped as much as 0.5 percent, while Standard & Poor’s 500 futures slipped 0.2 percent.

French car makers PSA Peugeot Citroen SA (UG) and Renault SA (RNO) are cutting tens of thousands of jobs to meet a shrinking European car market, while companies such as telecommunications equipment maker Alcatel-Lucent and drug maker Sanofi SA (SAN) are also slashing staff. Unemployment climbed to a 13-year high of 10.6 percent in the fourth quarter.

That’s weighing on domestic demand and tax receipts at a time when Hollande is struggling to cut France’s budget deficit, ease labor costs and improve job market flexibility.

Even so, the global economic recovery may be starting to help manufacturers. Sentiment among manufacturing executives climbed for a third month in February, the Bank of France said last week. The central bank’s services index, which is more closely correlated with domestic demand, fell.

‘Past Trough’

“Should industrial production stabilize at the January level in February and March, it would fall by materially less than in the fourth quarter” adding to the sense that French industry is “past its trough,” said Gilles Moec, an economist at Deutsche Bank in London.

In neighboring Germany, exports rose more than economists forecast in January, according to a report published by the Federal Statistics Office in Wiesbaden today. Seasonally adjusted exports advanced 1.4 percent from December, while economists expected a 0.5 percent gain, according to a Bloomberg survey.    

While the German economy shrank 0.6 percent in the final three months of last year, the Bundesbank predicts it will rebound in the current quarter. Confidence among investors and businesses jumped in February and retail sales rose the most more than six years in January. Still, factory orders unexpectedly fell and industrial production stagnated.

                    

“Very hesitantly, hard data is reflecting the strong rebound in sentiment surveys,” said Christian Schulz, senior economist at Berenberg Bank in London. “The economy is rebounding from the sharp contraction, but the extent of the rebound remains subject to some uncertainty.”

The European Central Bank last week cut its forecasts and now expects the euro-area economy, Germany’s biggest export market, to shrink 0.5 percent this year before growing by 1 percent in 2014. The German economy will expand 0.4 percent this year, according to the Bundesbank.

New Zealand economic decline

Manufacturers threaten to quit NZ

Opposition's parliamentary inquiry hears firms on verge of leaving country because of high exchange rate.

NZ Herald,

29 January, 2013

More leading export companies are on the verge of moving overseas due to the high dollar, Opposition MPs were told yesterday by manufacturers, who challenged the Government to do more to control the exchange rate.

Labour, the Greens, New Zealand First and Mana were holding the first of a series of hearings into what they say is the crisis in manufacturing.

MPs heard from business and union leaders as well as the chief executives of several leading export companies.

All said the exchange rate was their biggest headache and most warned they were considering moving overseas to stay in business.

David Bennett, managing director of Pacific Helmets, which manufactures helmets for fire services and other specialist applications, said his company wanted to stay in Wanganui, where it began in the 1970s, "but things are against us".

In 2001, a helmet selling for US$100 would generate $250 for the company; today the same helmet cost the same to manufacture but was generating just $127, Mr Bennett said.

Even at the average exchange rate over the last 10 years the return on the helmet would have been about $140 to $150.

Today's exchange rate meant a loss of about $27, Mr Bennett told MPs.

"Now you multiply that across tens of thousands of helmets and then across lots of companies that sell products overseas and that's the dollars that we're missing out in the New Zealand economy."

Stewart Hyde, manufacturing manager of Wyma Engineering, which makes vegetable polishing and handling machinery, said his company was recognised internationally as producing state-of-the-art equipment.

But difficulties competing internationally with a high exchange rate had forced it to source about four-fifths of its componentry from overseas, mainly China.

That had cost about 40 local jobs. The company was now considering moving its final assembly overseas.

"The question I would pose is how much does the Government want us to stay in New Zealand?"

Economic Development Minister Steven Joyce yesterday said he didn't agree there was a crisis.

"Nobody is arguing that being a manufacturer isn't challenging - in my history in business every time in business is challenging - but going around and trying to talk down the New Zealand economy and talk about a crisis in manufacturing is not particularly helpful."

Hamilton Jets managing director Keith Whiteley said other countries were "moving away from the single policy setting and are using interest rates to control exchange rates. New Zealand has to start looking at those issues."

Minister Joyce warns 'not to talk up' crisis

Currency intervention a fool's paradise, says Joyce Joyce

Radio NZ,

29 January, 2013

The Labour, Green, New Zealand First and Mana parties are holding a parliamentary inquiry into manufacturing after the finance select committee blocked a request for a similar investigation.

Businesses and unions appearing before the inquiry said the sector is being hit hard by the high and volatile exchange rate.

Economic Development Minister Steven Joyce says the Government is doing all it can to help the manufacturing industry but will not intervene in the exchange rate.

… Mr Joyce told Radio New Zealand's Morning Report programme on Tuesday it "becomes a bit of a fool's paradise" for a Government to intervene in the exchange rate.

The minister said the last time that was done was in the 1970s and was a big mistake.

"We all know how that turned out when we took a bet with the kiwi dollar against the world and lost," he said.

"My view of it is that the dollar is pretty high for some exporters, and my feeling is that it will come back over time, because it is based around the fundamentals of what people think the world economies are doing."

Mr Joyce says nobody is arguing that being a manufacturer is not challenging, but just like any industry, it is challenging for different companies and at different times.

"It all depends on their mix of inputs, where they get their business from, who they're selling to and all those things.

"There is no generic crisis in manufacturing but I would certainly acknowledge it is challenging for some companies."

The Labour Party says this country has fallen behind the world with its monetary policy as the country's most high value exporters complain they are struggling against the high value of the dollar.

Labour's finance spokesperson David Parker says countries such as Switzerland, the US, Singapore and China are prospering by intervening in their currency markets in different ways.

"And yet New Zealand, we sit here like saps and we've got an exchange rate which is driving people towards the wall."

Mr Parker says manufacturers are also complaining about the tax system, saying it does not distribute money into productive parts of the economy

Listen to more on Morning Report

Redundancies gathering pace, says union

The political parties holding the inquiry say 40,000 jobs have been cut from the manufacturing sector in the past four years and change is needed to reverse the trend.

Engineering, Printing and Manufacturing Union general secretary Bill Newson said not only have jobs been lost, but in the past year the trend of redundancies in manufacturing increased markedly.

"Over last year we had an average of two separate companies for every week of the year that notified us of the need to talk about redundancies as a result of downsizing, closing down or sending work overseas."

Mr Newson says when the union spoke to the employers about the reasons for the redundancies, a common theme was the high and volatile exchange rate.

Exporter tells of moving jobs offshore

An exporter of vegetable processing equipment told the inquiry the company may be forced to source all its materials from China because of the high New Zealand dollar.

Wyma manufacturing manager Stewart Hyde said the engineering company is being crippled by the relentless rise of the dollar.

He says his company has now transferred more than 40 manufacturing jobs to China.

"The question I would pose is, to what extent does the New Zealand Government want us to stay here, what policy settings are going to change to make that happen."

NZ Post wants cut in minimum delivery days

Radio NZ,

19 January, 2013

New Zealand Post is proposing changes that would allow it to reduce the number of days it delivers mail to most addresses from six to three days a week.

The number of items mailed last year was down 24% compared with 2002.

Communications and Information Technology Minister Amy Adams said the company wants greater flexibility in its postal services as mail volumes are forecast to fall further.

"In light of those significant reductions in mail volume, New Zealand Post is seeking to make changes to the Universal Service Obligations it is bound by."

Under its current Deed of Understanding, New Zealand Post must provide delivery on six days a week to 95% of addresses.

It wants to change that to not less than three days a week delivery to 99.88% of addresses.

Ms Adams said New Zealand Post also wants to introduce more self-service kiosks.

Submissions on the proposals close on 12 March.

The collapse of Europe

By The Numbers: 20 Facts About The Collapse Of Europe That Everyone Should Know

Michael Snyder

Economic Collapse Blog,

8 January, 2013

The economic implosion of Europe is accelerating.  Even while the mainstream media continues to proclaim that the financial crisis in Europe has been "averted", the economic statistics that are coming out of Europe just continue to get worse.  Manufacturing activity in Europe has been contracting month after month, the unemployment rate in the eurozone has hit yet another brand new record high, and the official unemployment rates in both Greece and Spain are now much higher than the peak unemployment rate in the United States during the Great Depression of the 1930s.  The economic situation in Europe is far worse than it was a year ago, and it is going to continue to get worse as austerity continues to take a huge toll on the economies of the eurozone.  It would be hard to understate how bad things have gotten - particularly in southern Europe.  The truth is that most of southern Europe is experiencing a full-blown economic depression right now.  Sadly, most Americans are paying very little attention to what is going on across the Atlantic.  But they should be watching, because this is what happens when nations accumulate too much debt.  The United States has the biggest debt burden of all, and eventually what is happening over in Spain, France, Italy, Portugal and Greece is going to happen over here as well.

The following are 20 facts about the collapse of Europe that everyone should know...

#1 10 Months: Manufacturing activity in both France and Germany has contracted for 10 months in a row.

#2 11.8 Percent: The unemployment rate in the eurozone has now risen to 11.8 percent - a brand new all-time high.

#3 17 Months: In November, Italy experienced the sharpest decline in retail sales that it had experienced in 17 months.

#4 20 Months: Manufacturing activity in Spain has contracted for 20 months in a row.

#5 20 Percent: It is estimated that bad loans now make up approximately 20 percent of all domestic loans in the Greek banking system at this point.

#6 22 Percent: A whopping 22 percent of the entire population of Ireland lives in jobless households.

#7 26 Percent: The unemployment rate in Greece is now 26 percent.  A year ago it was only 18.9 percent.

#8 26.6 Percent: The unemployment rate in Spain has risen to an astounding 26.6 percent.

#9 27.0 Percent: The unemployment rate for workers under the age of 25 in Cyprus.  Back in 2008, this number was well below 10 percent.

#10 28 Percent: Sales of French-made vehicles in November were down 28 percent compared to a year earlier.

#11 36 Percent: Today, the poverty rate in Greece is 36 percent.  Back in 2009 it was only about 20 percent.

#12 37.1 Percent: The unemployment rate for workers under the age of 25 in Italy - a brand new all-time high.

#13 44 Percent: An astounding 44 percent of the entire population of Bulgaria is facing "severe material deprivation".

#14 56.5 Percent: The unemployment rate for workers under the age of 25 in Spain - a brand new all-time high.

#15 57.6 Percent: The unemployment rate for workers under the age of 25 in Greece - a brand new all-time high.

#16 60 Percent: Citigroup is projecting that there is a 60 percent probability that Greece will leave the eurozone within the next 12 to 18 months.

#17 70 Percent: It has been reported that some homes in Spain are being sold at a 70% discount from where they were at during the peak of the housing bubble back in 2006.  At this point there are approximately 2 million unsold homes in Spain.

#18 200 Percent: The debt to GDP ratio in Greece is rapidly approaching 200 percent.

#19 1997: According to the Committee of French Automobile Producers, 2012 was the worst year for the French automobile industry since 1997.

#20 2 Million: Back in 2005, the French auto industry produced about 3.5 million vehicles.  In 2012, that number dropped to about 2 million vehicles.

One thing that these shocking numbers cannot convey is the tremendous amount of pain that many average Europeans are living through on a daily basis at this point.  To get a peek into what life is like in Greece these days, check out this short excerpt from a recent Bloomberg article...

Anastasia Karagaitanaki, 57, is a former model and cafe owner in Thessaloniki, Greece. After losing her business to the financial crisis, she now sleeps on a daybed next to the refrigerator in her mother’s kitchen and depends on charity for food and insulin for her diabetes.

“I feel like my life has slipped through my hands,” said Karagaitanaki, whose brother also shares the one-bedroom apartment. “I feel like I’m dead.”

For thousands of Greeks like Karagaitanaki, the fabric of middle-class life is unraveling. Teachers, salaries slashed by a third, are stealing electricity. Families in once-stable neighborhoods are afraid to leave their homes because of rising street crime.

All over Europe, people that have lost all hope are actually setting themselves on fire in a desperate attempt to draw attention.  Millions of formerly middle class Europeans have lost everything and are becoming increasingly desperate.  Suicide and crime are skyrocketing all over southern Europe and massive street riots are erupting on a regular basis.

Unfortunately, this is just the beginning.  Things are going to get even worse for Europe.


Meanwhile, those of us living in the United States smugly look down our noses at Europe because we are still living in a false bubble of debt-fueled prosperity.


But eventually we will feel the sting of austerity as well.  The recent fiscal cliff deal was an indication of that.  Taxes are going up and government spending is at least going to slow down.  It won't be too long before the effects of that are felt in the economy.


And of course the reality of the situation is that the U.S. economy really did not perform very well at all during 2012 when you take a look at the numbers.  The cold, hard truth is that the U.S. economy has been declining for a very long time, and there are a whole bunch of reasons to expect that our decline will accelerate even further in 2013.


So if you are an American, don't laugh at what is happening over in Europe at the moment.  We are headed down the exact same path that they have gone, and we are going to experience the same kind of suffering that they are going through right now.


Use these last few "bubble months" to prepare for what is ahead.  At some point this "hope bubble" will disappear and then the time for preparation will be over.

Alumina refineries in Australasia

Rio may halt Australia alumina refinery: report

Market Watch,

6 January, 2013

Rio Tinto PLC RIO -0.34% is considering suspending operations at a loss-making alumina refinery in the Australia's Northern Territory after talks with the territory government over power supplies to the plant broke down last month, the Australian Financial Review reported Monday.

Rio is expected to announce a decision on the future of the Gove refinery by the end of this month having begun a review of its operations in October, the AFR reported, without saying where it got the information.

The mining group is considering boosting its bauxite exports from the plant, in the Arnhem Land region of the Northern Territory, until economic conditions improve, the AFR cited a company spokesman as saying. Rio Tinto's chief executive has previously described Gove as the least profitable of its global alumina assets.

The Northern Territory government has been seeking to negotiate an agreement with Rio to divert extra gas to Gove. However, the delay in brokering a deal means the company may be forced to decide the fate of the plant before knowing if it will gain access to a cheaper power source, according to the paper.

And the NZ situation – from October last year...

Bluff aluminium smelter on the market

NZ Herald,

17 October, 2012

New Zealand's largest single electricity user, the Rio Tinto aluminium smelter at Bluff, is for sale along with 12 other aluminium producing assets in the giant Australian minerals company's portfolio.

Long praised for the quality of the aluminium it produces, and propped up for a generation by discounted electricity prices that reflect the fact it uses one-seventh of all the power generated in New Zealand, the smelter at Tiwai Point is also among the older smelters in the Rio Tinto stable.

Also on the block are the Boyne, Bell Bay and Tomago smelters in Australia, along with the Gladstone power station, which provides electricity to the Boyne complex in Queensland.

It will also sell the Gove bauxite mine and alumina refinery.

The Australasian assets will be packaged as a new business unit, called Pacific Aluminium, for divestment when market conditions are right, the company said in a statement.

There was no immediate word on whether the 20.6 per cent of the smelter owned by the Japanese conglomerate Sumitomo Chemical is also for sale, or whether Mitsui may be an interested party.

"The assets identified ... are no longer aligned with our strategy and we believe they have a bright future under new ownership," said chief executive Tom Albanese, despite being well-managed, sound businesses with productive workforces.

"The strength of our balance sheet means that we can choose the most opportune method and timing to divest these assets, which may not occur until the economic climate improves."

Rio Tinto would continue to invest in its "core assets" to improve performance in its aluminium products group.

The Bluff smelter, operated as New Zealand Aluminium Smelters and previously owned by Comalco in a joint venture with Mitsui, was built partly to create a market for the huge hydro-electric output of the Manapouri scheme, now owned and operated by state-owned Meridian Energy.

The smelter employs 2,400 people and contributes A$506 million to the Southland economy a year, according to Rio's website

Australian downturn

There don't seem to be any recent PMI figures for New Zealand - is that because we don't have much in the way of manufacture any more. We rely on the Rugby World Cup, earthquakes and (now) "the Hobbit'

Australia Manufacturing Contracts Further In November

NASDAQ,

3 December, 2012

SYDNEY--A key gauge of manufacturing activity in Australia fell in November, the latest sign a mining slowdown is weighing on the country's resources-dominated economy.

The Australian Industry Group Performance of Manufacturing Index fell 1.6 points in November to 43.6 from a month earlier. A PMI reading above 50 indicates an expansion in manufacturing activity from the previous month, whereas a reading below indicates contraction.

The weak reading comes a day ahead of the Reserve Bank of Australia's final policy setting meeting of the year, when the central bank is widely expected to cut its benchmark lending rate by a quarter of a percentage point to 3.0%. The RBA has so far lowered rates by 1.50 percentage points since November last year.

The contraction in manufacturing activity in November was widespread, with steep declines in the petroleum, coal products, construction materials and metals sectors. Only the food and beverages sector expanded during the month.

"The key concerns for manufacturers remain the high dollar, rising energy costs and weak demand in export and local markets," said Innes Willox, chief executive of the Australian Industry Group.

The Australian dollar has continued to trade above parity with the U.S. greenback through most of the year despite a sharp fall in commodity prices. Trading Monday at US$1.0428, the currency is blamed by some policy makers for eroding the competitiveness of Australian exports and manufacturers.

"These factors are exacerbated by the ongoing slump in the residential and commercial construction sectors and have not been offset by the reduction in interest rates to date," Mr. Willox said.

Increased pressure to cut peak electricity use

CabooltureNews,

30 November, 2012

THE growing pressure on Australians to cut their peak power use has been given a boost, with the Australian Energy Market Commission recommending consumers change their electricity usage.

After an 18-month investigation into the way the national electricity market operates and recommending changes, the AEMC released its final Power of Choice review report on Friday.

The commission recommended major changes to the National Electricity Rules and government programs which give consumers information about prices, and what options people have to change their power use.

It could also lead to higher prices during times of peak demand, such as during summer, in line with recent recommendations in the Federal Government's energy white paper.

The report will now go to the Standing Council of Energy and Resources, for state and federal ministers to decide what action will be taken

Another indicator of industrial slowdown

Mechel (MTL) Temporarily Halts Steelmaking Facilities in Romania, Ukraine

iStockAnalyst,

23 November, 2012

Mechel OAO (NYSE: MTL), a Russia-based integrated mining and steel company, reported a temporary suspension of steelmaking facilities in Romania and Ukraine due to unfavorable conditions for raw materials and finished steel products.

The company temporarily halted production at Donetsk Electrometallurgical Plant (DEMZ), which is part of Mechel's steel division, and the scheduled temporary suspension of production at the group's Romanian steel-making facilities that are part of Mechel's Eastern European Steel Division.

Starting on November 21 and 22, electric smelting facilities at Mechel Targoviste and Ductil Steel Otelu Rosu were temporarily halted. Rolling production at Mechel Targoviste will also be temporarily suspended starting November 27 once production plans are met. Starting December 15, rolling and hardware production is planned to be temporarily halted at Ductil Steel Buzau, Laminorul Braila and Mechel Campia Turzii.

http://www.istockanalyst.com/finance/story/6156435/mechel-mtl-temporarily-halts-steelmaking-facilities-in-romania-ukraine

Italy's Lucchini to halt steel furnace temporarily

Reuters,

23 November, 2012

Lucchini, Italy's second largest steel producer, will temporary shut down its Piombino blast furnace in December due to weak market conditions, the debt-burdened company said on Friday.

The Italian and European steel industry face a time of hardship due to declining demand and economic weakness.

"I can confirm that a temporary closure will take place due to market conditions. We make steel on order and given the current situation we have decided to halt the blast furnace," a spokesman for Lucchini said.

"In Italy we are not the only company planning to halt its furnace. We all know how difficult the situation is."

Piombino, Lucchini's main production site, can produce up to 2.5 million tonnes of steel every year. This compares with Italy's total production of 28.7 million tonnes in 2011.

http://www.reuters.com/article/2012/11/23/italy-steel-idUSL5E8MN9P220121123

Energy collapse in Pakistan

Pakistan energy crisis at tipping point

The energy crisis in Pakistan is fast reaching to the tipping point. The gas supply for all industrial sectors now remain closed for three and half days a week which is making tens of thousands poor jobless.

The energy crises may take the turn to the worst in coming weeks.

.

The European economy

European Industrial Production Plunges 2.3 Percent; Greece GDP Plunges 7.2 Percent

Mish's Global Economic Analysis,

14 November, 2012

Inquiring minds investigating the collapse in Europe note Euro-Zone Industrial Production Declines Steeply 

 Industrial production in the 17 countries that use the euro fell sharply in September as weak output across both the core and peripheral economies added to expectations for a poor third quarter gross domestic product print Thursday.

Data from the European Union's statistical agency Eurostat showed industrial production fell 2.5% on the month in September, That was the largest fall since January 2009 and compares with August's 0.9% increase. On the year, output dropped 2.3% after a 1.3% decline in August.

The data were weaker than expected as economists surveyed by Dow Jones Newswires last week had expected a 2.0% monthly fall and a 2.1% decline in annual terms.

Energy output fell 1.8% in September compared with August, the biggest fall since an 8.4% drop in March of this year, while a 2.8% month-on-month decline in production of non-durable consumer goods was the steepest since January 2000.

And, Eurostat said that a drop in car production across France and Germany saw both countries post monthly output falls of 2.7% and 2.1%, respectively. The fall in French output was the steepest since January 2009, while the drop in German production was the biggest since November last year.

Industrial production in Portugal fell 12.0% on the month in September, the biggest fall since records began in 2000 and was due primarily to strike action that month. And, Ireland's 12.6% monthly drop in output was mainly driven by a drop in activity in the pharmaceutical sector, Eurostat said.

Greece GDP Plunges 7.2 Percent

Reuters reports Greece sinks deeper into depression in third quarter 

 Greece's economic slump deepened in the third quarter, with output shrinking 7.2 percent on an annual basis as the debt-laden country heads into its sixth year of depression and struggles to meet its bailout targets.

The contraction was deeper than the second quarter's 6.3 percent drop and follows the passage of a tough 2013 budget by Prime Minister Antonis Samaras's government that is expected to continue to smother growth for most of next year.

Since 2009, the Mediterranean state's economic decline - which Samaras has dubbed Greece's "Great Depression" - has wiped a fifth off economic output and sent unemployment to a record high, putting one in four Greeks out of work.

The reading could point to an even grimmer outlook, analysts said, because it was offset by better-than-expected returns from the country's vital tourism sector, which accounts for a fifth of Greece's 215 billion euro economy.

Spain is also in recession, and fellow austerity-hit Portugal's contraction deepened in the third quarter, with export growth slowing and domestic demand hit by an austerity programme imposed under the country's international bailout.

Portugal's economy shrank 3.4 percent year on year, National Statistics Institute INE said on Wednesday, accelerating from the previous quarter's revised 3.2 percent drop.

Little to add other than things will get much worse. Expect France and Germany to take a big economic dive as well.

Looking Ahead, Spain Worse

 

 

 

Than Greece; Only One

 

 

 

Realistic Solution

 

 

 

Mish's Global Economic Analysis,

14 November, 2012

Both Greece and Spain are in the midst of huge depressions. The unemployment rate in Spain is 25.8%, in Greece it's 24.4%. Youth unemployment is over 50% in both countries. 

Greece is in its 6th year of depression and GDP is down another 7.2%. Expect Spain to follow. 

Matthew Dalton, writing for the Wall Street Journal explains Where Spain Is Worse Than Greece

 By most measures, Greece’s economy is in worse shape than Spain’s. Greece has been largely shut off from financial markets for more than two years; yields on its bonds are still sky high. Gross domestic product has fallen nearly 20% over the previous three years. Spain can still borrow from private investors, and its GDP has fallen around 5% during the crisis.

But if you take forecasts from the European Commission seriously, Greece enjoys one formidable advantage over Spain: Its economy is running well below capacity, while the Spanish economy, despite an unemployment rate around 25%, is operating relatively close to full steam.

Why is that an advantage? According to the commission, it means that the Greek unemployment rate should fall sharply if the economy starts to recover again, without causing inflation. Spain faces a much more difficult situation. If the structure of its labor market doesn’t change, the commission’s analysis suggests that a nascent economic recovery in Spain could be hampered by labor shortages that would spark wage inflation.

Greece faces similar problems, but they are less serious, according to the commission’s analysis. Yes, the “government-borrows-money-and funds-consumption” model of growth won’t be available to Greece anymore. But it didn’t endure the same private-sector credit bubble that hit Spain during the previous decade.

The differences between Greece and Spain can be seen in several economic metrics published by the commission. There is the output gap, or the difference between actual GDP and potential GDP (as a percentage of potential GDP). The figure is a whopping 13% for Greece but just 4.6% for Spain.

Then take a look at the commission’s estimates of the so-called non-accelerating wage rate of unemployment (NAWRU) in Greece and Spain. This is the unemployment rate below which the commission believes the inflation rate starts to rise. It’s also known as the “natural rate” of unemployment. The natural unemployment rate for Greece is around 14.8%; it is 21.5% for Spain. This despite unemployment rates around 25% in both countries.

Spain’s structural budget deficit is somewhat smaller than its actual deficit (6.3% of GDP vs. 8%), because of the country’s weak economy. But most of the deficit is still “structural,” according to the commission, a disturbing thought in a country where 25% of the workforce is unemployed.

And because the euro zone’s new “Fiscal Pact” requires countries to bring their structural deficits under 0.5% of GDP, Spain still has a lot of government austerity to endure before the cutting is done.

Only One Realistic Solution

 

I do not subscribe to the concept of a "natural rate of unemployment". Nonetheless, if even half of what Dalton writes is true, Spain is in a world of hurt.

I do think Dalton hits the target on structural issues and that puts an unsolvable problem on the Spanish government that is struggling mightily to not subject itself to Troika-imposed austerity measures in return for a bailout.

Eventually Spain, like Greece will see the light. The only way out of this mess is to leave the euro and simultaneously undertake structural reforms.