Portugal, Italy, Greece, And Spain, The PIGS Of Europe, Are Causing An Ouflow Of Industry And Investment From The Eurozone
Friday, May 30, 2008 8:37:01 PM
The eurozone has gained financial flows, but has lost industrial and investment flows; a large part of the issue is Latin debt; it is an investment drag on the Germanic industrial capability and output; thus there is the EWI:EWG diverence, sometimes called the Germanic-Latin differential, that began to noticeably widen in April 2007.
The euro is being held aloft by central banks in Asia, Russia, and the Middle East seeking an alternative to the dollar as a place to park their mushrooming currency reserves. In effect, the eurozone is now suffering from the reserve currency curse; and it is causing Airbus "currency torture" as it sells in US Dollars, $USD, and buys parts in Euros, and pays its workers in Euros, FXE.
So Airbus is now leading the rush to hollow out production inside the currency bloc, switching operations to the US, Mexico and India. "It really worries me that private accounts are selling assets like this," said Hans Redeker, BNP's currency chief.
Long-term private investors are pulling their money out of the eurozone at the fastest rate since the creation of the single currency.
Foreign direct investment (FDI) in plant and factories has turned deeply negative, reaching minus €149bn (£117bn) over the past year. It dropped to minus €19bn in March alone as the soaring euro pushed labour costs in southern Europe to uncompetitive levels.
The annual exodus of private funds from eurozone equities and bonds has reached almost $280bn. Taken together, the total outflows have topped €400bn in 12 months and may spell trouble for Europe's industry as the economic downturn gathers pace.
All of the four PIGS have suffered a relentless loss of competitiveness since the European Monetary Union, the EMU, was launched. The deficits have reached 10pc of GDP in Spain and 14pc in Greece. None has begun to narrow the gap in unit labour costs with Germany, ensuring that the inevitable adjustment will be more severe when it comes.
Indeed, Spain's inflation surged to a record 4.7pc in May. The country now faces the most acute "stagflation crisis" in the developed world. House prices have fallen 15pc nationwide since September, according to the developers' association (APCE). Madrid University warned this week that Spain's property slump could throw 1.1m people out of work.
Mr Redeker said the 'PIGS' quartet was now facing "collapse", with mounting signs of stress in France as well after consumer confidence fell to the lowest level in 20 years. French property sales fell 28pc in the first quarter.
"There are a lot of ugly surprises in store as deleveraging finally hits Europe. Investors are going to stop treating the eurozone as if it were Germany, and take very close look at the deficits of the southern countries. We can expect bond spreads to widen significantly," he said. "We will discover in this downturn whether the eurozone is really an 'optimal currency area'. This is the test."
Jean-Claude Trichet, the president of the European Central Bank, told Italy's Il Sole that the euro had been a shield against the financial storms of the past year. "We've strangely forgotten what happened in the 1980s and 1990s when we all our national currencies created so many problems. Today, we've had an impressive correction in global finances. Imagine what would have happened without the euro," he said.
Commentary by Richard
It's not only the PIGS country debt that is at the bottom of the issue, it's also the real estate investment debt of Spain, it's irredeemable, an its gone toxic, devaluing not only the Spanish stock market, but other european stock markets as well.
And to add to the toxic brew, there is the level two and level three assets that is residing on the German State Banks books; and remember that its leveraged up to 32 or 37 times the underlying value as it came through financialization, that is securitization provided by Wall Street investment bankers.
I present The Liquidation Thesis that holds government services and payments, service sector jobs, public and private debt of all types, and unfunded retiree benefits are going to be liquidated, that is done away with.