Brighter short-term outlook for European metals sector ... but action needed

COMMENT

BILLJAMIESON | Executive Editor of The Scotsman

Building to a catharsis?

A political as well as an economic storm is brewing in Europe.

How ironic, but how telling, that in the week US unemployment dipped below six per cent to a six-year low, European markets were plunged into turmoil on evidence of worsening economic slowdown and yet another confused and inconclusive European Central Bank meeting.

There is much about America’s recovery that’s far from perfect. But it is a model of economic performance compared to the deepening paralysis that now grips the eurozone.

Latest Eurostat readings show unemployment in the euro area stubbornly stuck at 11.5 per cent. Many of its economies are now in retreat where a pulse can be detected at all. A recent Markit business confidence survey showed the eurozone economy ‘stuck in a rut’. Its latest Purchasing Managers Index (PMI) recorded a further fall in activity. The overall picture, it said, is of an economy ‘struggling against multiple headwinds’.

One of the biggest ‘headwinds’ of all are the euro area’s policymakers. It was not just the miserable PMI readings but growing fears of policy gridlock across the eurozone and an explosion of pent-up political frustration ahead that have prompted a fresh outbreak of market volatility.

Hints by European Central Bank president Mario Draghi that he was retreating from previous pledges for a one trillion euro stimulus blockbuster, and confusion over the scale of future quantitative easing on which the zone’s most ailing economies have been desperately counting, have unnerved markets. Adding to the disarray were reports that senior German economists had erupted with fury to the ECB’s first asset purchases, which could end up in a tangle of law suits in the German courts.

Wrote the president of Germany’s leading think tank, the Ifo Institute for Economic Research, “My prediction is not that the euro will fall apart, but that it leads to a stagnation and animosity even more than we see today across the people of Europe.”

In France and Italy – the second and third largest eurozone countries respectively – growth has ground to a near standstill while budget deficits continue to climb. Both countries have new political leaderships but face entrenched resistance to reform. Meanwhile the ECB seems as reluctant as ever to take action by way of monetary loosening. While Mario Draghi gave the impression that the ECB had more policy ammunition to fire if needed, this has been his mantra for many months. Specific action on monetary easing – with firm numbers attached – is what markets have been expecting for months.

So, far from Draghi’s remarks reassuring policy watchers, it left the impression that it has run out of road. And it risks being dumped with the blame – rather than euro politicians for their failure to take the action required: cutting the bureaucratic stranglehold, easing regulatory barriers to expansion and employment and liberalising their economies.

Says Marc Ostwald, economist at ADM Investor Services International, “if current ECB measures are not effective, if France continues to do nothing to reinvigorate its economy, and if ECB suggestions that it could still do government bond QE proves to be nothing than hollow bluster, then the prospects for the eurozone do appear very bleak, and further EUR weakness, perhaps very sharp, would appear inevitable.”

There is much about America’s recovery that’s far from perfect. But it is a model of economic performance compared to the deepening paralysis that now grips the eurozone.

Italy and France on the edge

Anyone doubting the nature of the precipice to which many of the eurozone economies are now clinging would have learnt much from the backcloth to the ECB’s Governing Council meeting in October. It was held in Naples, where the effects of eurozone policies – or more accurately the lack of them – on Mediterranean member states were vividly evident. The jobless rate in Naples is running at 25 per cent – and at 56 per cent for the 15–24 age group. Far from the economy turning up, it looks set to enter its third recession since the global financial crisis.

“In truth,” says veteran eurozone watcher Stephen Lewis, “it makes more sense to regard Italy’s malaise since 2008 as one long recession, with only two brief intermissions in the downtrend in economic activity along the way.”

The country’s new prime minister, with his carefully cultivated image of dynamism, promised a clean break from the past and the start of an era of structural change. However, eight months on, hopes for Italy’s economic revival are being sorely tested. Last year its real GDP was 12 per cent below its 2007 level, while government debt leapt by 29 per cent. And the economy shows no sign of expanding to any meaningful extent.

Yet, formidable though these problems are, they have been eclipsed by those of France, regarded as part of the eurozone core. Growth here has slowed to a crawl, voter frustration is increasingly evident, and attempts to wriggle out of commitments to reduce its budget deficit to the EU-mandated level of three per cent threaten more trouble.

So: convergence ambitions are floundering, Germany recoils at the open-ended commitment to bail out countries that have done little to pursue growth policies. And markets smell trouble ahead. This is why many now believe a political as well as economic storm is brewing in the eurozone. Six years on from the global crisis, it awaits a cathartic moment. n

BRIGHTER SHORT-TERM OUTLOOK FOR EUROPEAN METALS SECTOR