Eurozone economy trapped in recession

Brussels — The dogged recession across the eurozone is deepening with the latest EU figures released Wednesday showing a full year-and-a-half of contraction as tens of millions languish in unemployment.

With governments trapped in austerity, banks refusing to lend and leaders resorting to urgent bids to unlock tax hidden in offshore bank vaults, the eurozone is now firmly entrenched as the global economy's "weakest link," according to Dutch-based ING analysts.

One week from another tense summit of EU leaders, official figures showed a 0.2 percent contraction between January and March, in the longest recession since the single currency bloc was established in 1999.

On a year-by-year comparison, data agency Eurostat said this translated into a 1.0 percent drop in output across the 17 states that share the euro—which are home to 340 million people.

While core economy Germany clambered out of negative territory with 0.1-percent growth after a 0.7-percent slide at the end of 2012, France sank into recession with a 0.2-percent reduction and both Italy and Spain posted 0.5-percent drops, the figures showed.

"We doubt that the region is about to embark on a sustained recovery any time soon," said Ben May of London-based Capital Economics, citing disappointing survey results in recent weeks.

The latest official European Commission forecast for 2013 published earlier this month tipped a 0.4-percent contraction, but the analyst said that was way off course with "something closer to a two-percent decline" likely.

His firm's pessimism was backed by Howard Archer of fellow London-based specialist analysts, IHS Global Insight.

"We expect the eurozone to suffer gross domestic product (GDP) contraction of 0.7 percent in 2013 with very gradual recovery only starting in the latter months of the year," said Archer.

"Today's GDP figures once again show that the eurozone remains the weakest link in the world economy," said the ING analyst, Peter Vanden Houte, though "a subdued recovery in the second half of the year is still possible."

But for that to happen, it would be "imperative that eurozone leaders maintain the momentum in the strengthening of the monetary union, with the banking union as a first important hurdle to be taken."

He tipped action by the European Central Bank to boost lending to small businesses.

No figures were given for growth in Ireland which, among the bailout economies, appeared to have turned the corner in the previous quarter with flat instead of negative growth.

However, Cyprus, at negative 1.3 percent, can expect a sharp deterioration later, given that the figure was for the period prior to bailout negotiations that saw banks in lockdown for a fortnight. — Agence France-Presse

source: gmanetwork.com

Spain joblessness hits new high, fueling austerity debate

MADRID - Unemployment in Spain jumped to a record 27.2 percent, data showed on Thursday, fueling a European debate over whether to ditch austerity policies and switch to reviving economic growth.

More than 6 million Spaniards were out of work in the first three months of this year, raising the rate in the euro zone's fourth biggest economy to a level unseen since records began in the 1970s.

Joblessness has grown for seven quarters in a row, leaving more Spaniards without work than the entire population of Denmark, and the percentage rate now matches that of Greece, which is in the grips of a full-blown depression.

Spain has slipped in an out of recession for the past five years. In the first quarter more businesses and individuals went into bankruptcy and default, further driving up bad loan rates in Spain's troubled banking system and hitting profits at three of the country's top five lenders, Santander, Caixabank and Sabadell.

The grim economic picture contrasts sharply with financial markets. There, waves of liquidity from around the globe have brought down Spain's borrowing costs and all but banished last year's fears that a budget crisis would force Madrid to seek a international sovereign bailout.

"These figures are worse than expected and highlight the serious situation of the Spanish economy as well as the shocking decoupling between the real and the financial economy," strategist at Citi in Madrid Jose Luis Martinez said.

On the markets, yields on Spain's 10-year bond fell this week to their lowest level since late 2010.

Prime Minister Mariano Rajoy imposed drastic spending cuts and tax increases last year, trying to bring a huge budget deficit under control, in line with the euro zone's policy of fighting its debt crisis with austerity. However, the belt-tightening has aggravated the Spanish economy's problems.

With the entire euro zone heading into a second year of recession, top EU economics official Olli Rehn and his boss European Commission President Jose Manuel Barroso have begun to push for more flexibility on public deficits.

Others, including European Central Bank policymakers, disagree, saying easing up on austerity would not mean economic recovery. Nevertheless, senior sources said the ECB is closer to lowering interest rates than at any time since it last cut them in July 2012, and is likely to shave a quarter percentage point off its main rate next week.

Spain's weak economy is hurting even the likes of Santander, the euro zone's biggest bank. Santander reported a 26 percent drop in its net profit on the quarter, citing the prolonged recession, low interest rates and the need to set aside more capital to cover rising bad loans.

Rajoy has tried for months to tread a line between the pro-austerity and pro-growth camps, saying Spain would always be disciplined on spending but indicating that his next round of measures, to be announced on Friday, would lean more to stimulating small business growth than short-term cost cuts.

Given this tight-rope act, few economists believe Rajoy's new measures will be ambitious enough to restart the ailing economy and create jobs.

Embittered public

Rajoy's budget cuts, along with corruption scandals, have embittered the public and protests have become commonplace.

Police arrested four people in Madrid before dawn on Thursday on accusations of trying to set fire to a bank. Demonstrators plan to march on parliament at 1500 GMT to protest against Rajoy's economic policy and the cost of a 41.5 billion euro bailout of Spanish banks that will fall on taxpayers.

Most banks reported that non-performing loans rose in the quarter as unemployed Spaniards continue to default on their mortgages and other credit, and companies go under.

Sabadell, Spain's fifth biggest bank, said the financial situation was highly unstable and complex due to a weak economy, low interest rates and financial sector reform.

In another sign of growing concerns about the economy, banking and official sources said the Bank of Spain was preparing new rules that could force lenders to recognize bad corporate debts that have until now been classified as sound.

Most Spanish companies are currently cut off from regular loan financing, a situation that has fuelled a sharp increase in bankruptcies in the first quarter of the year.

Hundreds of other firms are shutting down or leaving Spain, such as French electronics retailer Darty, while the country's biggest employers are making mass layoffs. Airline Iberia , international telecoms group Vodafone and Madrid's public television station Telemadrid all announced plans to cut thousands of jobs in the first part of this year.

Youth unemployment has soared to 57 percent and Spain's population fell last year for the first time on record as young people and immigrants who came to Spain to work in the once booming construction industry, flee the crisis.

Analysts say the most troubling statistic is that almost a third of jobless have been out of work for more than two years. Also, two million Spanish households have no one earning a wage.

"More than half Spain's unemployed have very low levels of education and skill levels and that, combined with several years of unemployment, is the biggest risk to recovery in Spain," said Marcel Jansen at Madrid-based think tank Fedea.

"How on earth are we going to reemploy more than 3 million low educated people? This is a big question mark." — Reuters

source: gmanetwork.com

Debt Levels, Big Monetary Stimulus on Tap at G20

Finance leaders of the G20 economies on Friday were set to debate specific targets for reigning in debt levels and the potential dangers from the latest round of aggressive easing of monetary policy from the world's biggest central banks.

They were also poised to demand swifter resolution to setting guidelines for financial benchmarks like the Libor interest rate in the wake of a global rate-rigging scandal.

But a rethinking of the austerity push among the world's biggest economies loomed as the biggest talking point. Advanced economies, particularly in Europe, have undertaken sharp austerity drives in recent years to curb growing debt, but those efforts have at times damaged economies already suffering from capital flight and under-investment from the private sector.

EU Economic and Monetary Affairs Commissioner Olli Rehn told Reuters in an interview on Thursday that a period of reduced spending and borrowing was necessary to calm markets concerned about out-of-control debt levels, particularly in peripheral European countries. That time has passed, he said.

"Decisive action was taken. Now as we have restored the credibility in the short-term, that gives us the possibility of having a smoother path of fiscal adjustment in the medium-term," he said.

The United States has opposed committing to any targeted level of public debt as a percentage of GDP, a common way to measure a nation's debt burden.

"I think an issue that will come up ... is the issue of hard targets, or not, for debt-to-GDP," Canadian Finance Minister Jim Flaherty told reporters on Thursday.

In a 2010 study frequently cited by policymakers, Harvard professors Kenneth Rogoff and Carmen Reinhart found that on average, economies contract when the debt-to-GDP ratio surpasses 90 percent - a level G20 officials were set to debate.

However, the study's results were disputed by researchers at the University of Massachusetts at Amherst, who said growth for countries with those ratios was actually 2.2 percent.

Weakness in economies that undertook the most severe measures to cut deficits undercut the austerity argument. The United Kingdom, in particular, is suffering its third recession in the last five years.

Still, Flaherty urged the G20 to set hard targets on debt and deficit, though he added that troubled economies should move more slowly towards balanced budgets than others.

"It's important for confidence by investors, which leads to more investment, economic growth and jobs," Flaherty said.

SPILLOVER CONCERNS

The unprecedented level of monetary stimulus designed to reinvigorate struggling large economies, including the United States, the euro zone and Japan, has raised concerns about excessive capital flight to developing nations.

In a communique on Thursday, the Group of 24 developing nations, whose ranks include Brazil, India, South Africa and Mexico, called on the advanced economies to "take into account the negative spillover effects ... of prolonged unconventional monetary policies including on inflation and the volatility of capital flows and commodity prices."

The Bank of Japan is attempting to end decades of stagnation by pumping $1.4 trillion into its economy, some of which is expected to find its way into emerging markets. Local currency funds have pulled in $16.7 billion in the first quarter of 2013 worldwide, the most in more than two years, according to Lipper, a unit of Thomson Reuters.

"There is a call from the G24 members to have clear coordination and better communication between advanced economies and emerging markets ... towards using coordination as a way to mitigate these potential asset appreciation bubbles. The consensus is that this is something that has to be closely monitored," said Mexican Finance Minister Luis Videgaray.

Videgaray has cause for concern.

In the days following the Bank of Japan's announcement, for example, the Mexican peso jumped 2.5 percent against the dollar to its strongest in 20 months. Against the yen, the peso surged over 9 percent.

Bank of Japan Governor Haruhiko Kuroda, in response to questioning about the country's aggressive efforts, said he didn't see signs of asset price bubbles "brewing in emerging nations" as a result of monetary stimulus.

"It's true that the massive monetary stimulus of advanced economies may affect emerging economies including through capital inflows," he said. "Such spill-over effects had been discussed even before the G20 meeting, and will likely be on the agenda at (this week's) meeting too."

The G20 finance ministers are due to release their formal communique around midday on Friday. They plan to task the Financial Stability Board, a coordinating body of global financial regulators, with overseeing the reform of financial benchmarks such as Libor, two sources familiar with the situation told Reuters on Thursday.

An early draft of a communique G20 financial officials will be debating asks the FSB to take on the role after a global interest rate-rigging scandal that involved some of the world's largest banks.

The International Organization of Securities Commissions came out with a report this week saying that financial benchmarks should be based on actual transactions rather than estimates, such as is the case with Libor.

source: foxbusiness.com

EU leaders strike deal on long-term austerity

European Union leaders reached agreement on the first ever cut in their common budget yesterday after 24 hours of intense negotiations, seeking to placate millions at home struggling through government cutbacks and recession.
The expected deal met the demands of northern European countries such as Britain and the Netherlands that wanted belt-tightening, while maintaining spending on farm subsidies and infrastructure to satisfy the likes of France and Poland.
It is the first net reduction to the EU’s long-term budget in the bloc’s history, representing a decrease of around 3% on the last budget and shaving spending in areas such as infrastructure, bureaucracy and scientific research.
Last-minute haggling over precisely how to divide up the €960bn ($1.3tn) to be spent between 2014 and 2020 dragged out the process, before Herman Van Rompuy, the president of the European Council and chairman of the summit, announced that a definitive deal had been struck among the leaders.
“Deal done!” he said in a message posted on Twitter.
At a news conference shortly afterwards, battling to stay alert after nearly 36 hours awake, Van Rompuy said the agreement was a budget of moderation that reflected straightened times.
“We simply could not ignore the extremely difficult economic realities across Europe, so it had to be a leaner budget,” he said. “For the first time ever, there is a real cut compared to the last multi-annual financial framework.”
The deal must now be approved by the European Parliament, where leading legislators have already expressed opposition. Securing parliamentary approval is likely to take several months and is far from guaranteed.
After negotiating through the night, leaders broke for a brief rest, allowing German Chancellor Angela Merkel to swap her green jacket for a lilac one, and returned to address a list of questions, including how to satisfy smaller countries such as Romania and Bulgaria among the 28 states covered by the budget.
Mindful of their restive voters, Northern European countries were adamant that as they shrink spending at home and grapple with the aftermath of the global financial crisis, the European Union had to do the same by cutting headline spending.
Around €12bn was cut from the last budget proposal, made at a summit in November, bringing the total reduction from the European Commission’s original blueprint to €85bn.
European Commission President Jose Manuel Barroso said he was disappointed, but understood the logic.
While vast as a headline figure, in annual terms the budget amounts to just 1% of total EU economic output.
The cuts agreed fell mainly on spending for cross-border transport, energy and telecoms projects, which were reduced by more than 11bn euros. Pay and perks for EU officials — a top target for Britain — were lowered by around €1bn.
Spending on agriculture was spared further cuts, and there was an increase of about €1.5bn on rural development over the seven years, satisfying France, Italy and Spain.
Even with a deal, around 40% of the spending will still be dedicated to farming, something that frustrates many northern European states, which want a more dynamic budget.
At the same time, officials said money had been set aside for measures to stimulate economic growth, for research and for structural funds to flow to countries worst hit by the economic crisis, including Greece, Ireland, Portugal and Spain.
There were also stipulations for green investment and €6bn for a fund to combat youth unemployment via apprenticeships in hard-hit countries.
The deal still faces further hurdles, not least at the bloc’s parliament.
“The European Parliament will not accept this deficit budget if it is adopted in this way. That is certain,” the parliament’s president Martin Schulz said.
Van Rompuy urged the parliament to be responsible and to reflect carefully before deciding to reject the spending plan.
In recent weeks, Van Rompuy has been in touch with every EU leader to assess where the contours of an agreement may lie.
But reaching a deal was never going to be a simple since it also involves delicate negotiations over rebates — amounts countries get re-imbursed after they have made contributions.
Denmark won a refund of around €130mn a year, but other rebates were trimmed or modified.
The Czech Republic was among a small group of countries that fought for final extra distributions, mostly for funds to build infrastructure.
The EU calculates two budget numbers: a headline ‘commitments’ figure that sets a ceiling on how much can be paid out, and a lower ‘payments’ figure that indicates what will actually be spent.
The baseline payments figure in the framework agreed yesterday was €908bn, a figure low enough to convince Britain, which focuses on payments rather than commitments, that it was getting a satisfactory deal.

source: gulf-times.com