Eurozone crisis live: Merkel and Hollande tell Greece to keep reforming; euro recession looms – as it happened

European PMI index contracts again- what do the economists say? German service sector shrinks; Chinese manufacturing output at nine-month low; France heads into recession; U.S. jobless claims inch higher…


Powered by article titled “Eurozone crisis live: Another recession looms as private sector keeps shrinking” was written by Graeme Wearden, for on Thursday 23rd August 2012 06.52 UTC


Another word on Antonis Samaras’s interview with Le Monde (see 11.44am): there’s a bit of excitement swirling that Samaras has apparently discussed Greece generating money from some of its uninhabited islands.

The quotes don’t appear in the section of the interview which Le Monde has uploaded. However, Associated Press has got hold of the full interview, and reports that Samaras said that:

as long as this doesn’t pose problems for national security, some of these isles could have a commercial use.

That, though, doesn’t mean Athens is looking to sell them all to the first millionaire who shows up. Samaras added;

This is not, in any way, about selling them off for cheap, but about transforming unused terrain into capital that could generate revenue, at a fair price.

As The Journal explains here, some German politicians argued two years ago that Greece should look to profit from the thousands of islands that make up the country. That was very unpopular with Greek citizens, though, so Samaras will need to treat carefully…..


Good news is in short supply so far today, particularly from Germany, where car maker Opel has said employees will work reduced hours at two of its German factories, to address lower demand for vehicles.

The division, part of General Motors. said that it had reached a deal with unions and its employee councils. Staff at two factories, at Ruesselsheim and Kaiserslautern, will work reduced hours on 20 days through the end of the year.


The news that Germany’s economy weakened this month (see 8.38am) may make it harder for Angela Merkel to make concessions to help address the eurozone crisis, economists fear.

Commenting on this morning’s data which showed Germany’s private sector shrank at the fastest pace in over three years, ING economist Carsten Brzeski said:

For German Chancellor Merkel, today’s growth numbers are not as comfortable as they might look as they complicate the next steps in the euro crisis.

Economists are forecasting that Germany’s GDP will shrink in the current quarter, which could make the German people even less receptive to the idea of bailing out Southern Europe.

On the other hand… it might also concentrate minds on the damage being caused by the crisis, and the potential for further immense economic chaos if the euro disintegrated….


QE helps the rich the most

This might interest/enrage UK readers: the Bank of England has released a report into the impact of its quantitative easing programme. It admits that the richest 5% of households benefited most from the creation of hundreds of bilions of pounds of electronic money, while young people and the poorest gained the least.

Economics editor Larry Elliott has the story here.

And here’s some reaction from Twitter:


Greece’s prime minister, Antonis Samaras, has told Le Monde that social unrest could spread across Europe if Greece were to crash out of the euro.

Samaras told the French newspaper that Greece can still be saved if European politicians “do our job”, and criticised those who claim that a Greek exit from the euro would be manageable.

Samaras said:

A “Grexit”, as it is called, would be devastating for Greece and detrimental to Europe. This would result in a further reduction of 70% of our standard of living – it has already decreased by 35% – by the combined action of a devaluation and inflation. No society can address this impact. No democracy there could survive.

Social upheaval could become very contagious in other European countries. Add, of course, the reaction of financial markets to be anticipating the release of other European countries, causing a domino effect.

Samarasalso repeated the line he gave to German tabloid Bild, that Greece just needs “air” to help it recover. More here.


No Olympic boost for UK high street

Bad news for the UK economy: high street retailers have reported that sales fell this month, and fear that the next three months will be tougher.

The monthly CBI distributive trades survey found that 27% of retailers reported an increase in their volume of sales compared to a year ago, while 31% said they had seen a fall. Allowing for rounding, that works out as a “net balance” of –3.

Somewhat optimistically, the CBI describes this as “broadly in line with expectations of +3%”. Clearly it’s worse (and also, Reuters reckons economists were expecting +15).

Most worryingly, business sentiment has weakened more than at any time since February 2009.

Judith McKenna, chair of the CBI distributive trades panel and Asda’s chief operating officer, said hopes of an Olympic bounce have been dashed.

Although this summer’s events created a mood of celebration across the nation, these figures would suggest this positivity did not extend to the high street.


Norway’s economy continues to defy the general malaise in Europe. Its economy grew by 1.2% in the second quarter of 2012, or 1% if oil revenue was excluded.

That beats all the major countries in the European Union (which shrank by 0.2% during the quarter).

Being outside the EU is not holding Norway back. This graph shows how its economy emerged from recession at the start of 2010, and has posted strong growth since:


In the bond markets, Spanish government debt has weakened this morning.

The yield* on Spain’s 10-year bonds has risen to 6.432%, up 11 basis points overnight. That’s still some way below the “danger zone”; but it means the spread between Spanish and German bond yields has widened again.

German-Spanish spreads had been closing in recent days, thanks to speculation that the European Central Bank will act to lower Spain’s borrowing costs. Today, though, there is plenty of worry that the ECB might disappoint.

Jane Foley of Rabobank commented:

The recession in Spain and the impact of slower growth in Europe on countries as far afield as China and Japan (which have recently posted poor export data) provide a good argument for the ECB to underpin the current better tone of the market.

However, clearly there are risks; the ECB may insist on more action from politicians before acting.

*- in general terms, the yield is the interest rate on the bond, so a measure of how much it would cost a country to borrow


City economists agree that this morning’s PMI data shows the eurozone is in recession (although we won’t know for sure for a couple of months).

Having shrunk by 0.2% between April and June, the news that private sector output fell again in August indicates the contraction continued in the current quarter.

Here’s a round-up of reaction (via Reuters):

Julien Manceaux of ING:

The composite PMI still indicates a contraction of activity in the euro zone as a whole. In our view, this confirms that the decline in euro zone GDP in the second quarter is likely to be the first leg of a technical recession.

Jeavon Lolay of Lloyds Banking Group:

In terms of where they are this is consistent with contraction in euro area GDP.

You could argue it was slightly better than expected but there isn’t
much to add. It could have been gloomier.

Annalisa Piazza of Newedge Strategy:

Our survey-based GDP forecast continues to point to a -0.3-0.4 percent q/q decline in euro zone GDP in Q3. However, a less gloomy scenario might emerge, should business confidence and activity stabilized in the coming months.

There was one bit of good-ish news this morning; updated GDP data confirmed that Germany grew by 0.3% in Q2 2012.


Europe’s private sector has shrunk again in August, for the seventh month in a row, driven by this morning’s weak performance from Germany (see 8.38am).

The Eurozone PMI composite output index, which measures activity in services and manufacturing firms across the euro region, hit 46.6 this month. Any number below 50 means a contraction.

The figure is slightly better than July’s 46.5, suggesting the euro economy shrank very slightly less this month. But the data confirms fears that the eurozone has dropped into recession.

Rob Dobson, senior economist at Markit said:

Taken together, the July and August readings would historically be consistent with GDP falling by around 0.5%-0.6% quarter-on-quarter, so it would take a substantial bounce in September to change this outlook.

The downturn is still led by the manufacturing sector, despite its pace of contraction easing a little this month. The service sector is also not out the woods, as business activity declined at an accelerated pace.

While eurozone manufacturing showed some improvement (45.3, up from 44 in July) was a little better than expected, service sector output was worse (47.5, down from 47.9).

This graph shows how the PMI data often closely tracks GDP. That backs up Rob Dobson’s point about the eurozone sliding into recession (it shrank by 0.2% in the second quarter of 2012).


Schäuble: Time will not solve Greece’s problems

Wolfgang Schäuble, Germany’s finance minister, has warned this morning that Greece’s problems will not be solved by granting it more time to hit its targets.

Schäuble just spoke to Germany’s SWR radio, and declared:

More time is not a solution to the problems

… adding that the two-year extension being sought by Greek prime minister Antonis Samaras would certainly mean “more money”.

Schäuble also argued that the eurozone had reached the limits of what is economically viable with its aid to Greek, a signal to Athens that it must deliver on what has been agreed.

In the City, Elisabeth Afseth of Investec is also unconvinced by Samaras’s argument that more time would not necessarily mean more money. She writes:

With its European partners reluctant to ‘throw money into a bottomless pit’ Samaras’ insistence that Greece requires no more money is supposed to reassure. It is blatantly obvious though that running a higher deficit for longer will involve additional debt, it may be recouped in the long run by stronger growth, but there will be extra money required initially.

Greek officials have been saying a 2 year extension will require at least €20bn of extra funding, but the plan is for this to be found though using IMF funds earlier than planned and through maturity extensions.



Germany’s private sector has suffered its weakest monthly performance in three years, data just released by Markit showed.

A worse-than-expected performance from its service sector is to blame, with output contracting (the German services PMI fell to 48.3, from 50.1).

Manufacturing output also shrank again, but at a slower pace (with a PMI of 45.1 versus 43 last month).

The overall picture is of an economy suffering from the crisis in the eurozone periphery.

Tim Moore, senior economist at Markit said:

The German economy is sailing into greater headwinds as the third quarter progresses, with PMI readings slipping deeper into territory normally associated with GDP contractions.

Outside of the 2008/09 downturn, the German composite index hasn’t been this low for this long since the time of the 2003 recession.


This is perhaps the most alarming fact in this morning’s Chinese manufacturing data (see 8.02am): stocks of finished goods jumped at their fastest rate since the survey began in 2004.

This graph shows how Chinese factories have been left with more and more unsold products since the start of the year:

With new orders falling, concern is growing that Chinese manufacturers will be left with more and more products that they can’t sell into a slowing global economy.

The Financial Times reported earlier this week that stocks of clothes, shoes, electrical goods, cars and even houses are growing to “Himalayan levels”, adding:

Over the past week, the country’s main retailers descended into a price war. It began when online retailer vowed that it would sell home appliances at a zero profit margin.

The commodities sector is also dealing with a huge inventory overhang, most graphically in the piles of coal that have built up at ports across the country.

More here.


The French private sector continued to shrink last month, data just released showed. But there are also reasons for optimism.

The composite French PMI came in at 48.9, showing that private sector output fell again. But this is an improvement on July’s 47.9, and the best figure in six months.

French manufacturing output continued to fall, as the long-running contraction in its factory sector rolled on. The PMI of 46.2 shows that output still fell, but at a less steep rate than July.

Jack Kennedy, senior economist at Markit (who compiled the report), said the data showed that France might finally slide into recession this quarter after nine months of stagnation:

While France just avoided a fall in GDP during the second quarter of 2012, according to the first official estimate, PMI data currently suggest contraction is on the cards for Q3.

Moreover, the continued declines in employment shown by the latest flash PMI data point to rising jobless levels, which would further weaken demand.


Key event

This morning’s weak manufacturing data could prompt China to launch a new stimulus package, economists believe.

HSBC, whose data shows that output dropped to a nine-month low, said the Beijing government should ease monetary policy. Otherwise, the world’s second largest economy could be knocked off course.

HSBC chief economist for China, Qu Hongbin, said:

Chinese producers are still struggling with strong global headwinds.

To achieve the stated policy goal of stabilizing growth and the jobs market, Beijing must step up policy easing to lift infrastructure investment in the coming months.

The data comes a day after some very poor trade data from Japan, which showed a slump in exports to the European Union.

Getting a clear picture of the state of the Chinese economy is tricky, but there are suggestions that some factory bosses are laying off workers or shutting down altogether.


Good morning, and welcome to our rolling coverage of the eurozone crisis.

Coming up today: fresh economic data showing the state of the European economy will be released this morning. The monthly PMI surveys are expected to show that activity in the eurozone services and manufacturing sectors fell again in August.

With eurozone GDP having shrunk in the second quarter of 2012, the data should show whether the situation has worsened.

Disappointing manufacturing data from China has already been released this morning. Output hit its lowest level since last November.

The Chinese Purchasing Managers’ Index (PMI) dropped to 47.8, compared with a final reading of 49.3 in July, according to HSBC. Any number below 50 indicates that manufacturing activity is contracting.

Here’s what’s coming next:

• French PMI for Manufacturing, and for Services 8am BST

• German PMI for Manufacturing, and for Services 8.30am BST

• Eurozone PMI for Manufacturing, and for Services 9.00am BST

The overall eurozone composite PMI is also released at 9am, which will show how the region’s private sector performed. Economists believe it will show another contraction, but will it be worse than last month’s 46.5?

We’ll also be tracking the latest developments across the eurozone, as usual.

One key event today: Angela Merkel and François Hollande will meet in Berlin tonight to discuss the situation in Greece, and Athens’ request for a delay to its financial programme. But as reported last night, it appears that the Greek government must wait until at least mid September for an answer. © Guardian News & Media Limited 2010

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