FINANCIAL ICEBERG

Always consider hidden risks

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EU Competitiveness - a wish



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In the graph below, you can see the evolution of the unit labor costs in Europe from the year 2000. As we can observe, Greece and Spain have already started to manage their competitiveness trough a lowering of their unit labor costs. But as a surprise to us was that Italy and France were the worts performer in their of bringing their unit labor costs downward...​

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And if we do check the manufacturing competitiveness from the 2013 GlobalManufacturing Competitiveness Index ( see table below ),

we can see that in Europe ( in green ), Germany is the most competitive and Greece the least. But what is striking us is the deep difference even between Germany, France and Italy... On this survey, South Africa is more competitive than France ...

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​​​Global CEO Survey: 2013 Country manufacturing competitiveness index rankings



​​Current competitivenessCompetitiveness in fve years



RankCountryIndex scoreRankCountryIndex score 10 = High 1 = Low





China 10.00

Germany 7.98

United States of America 7.84

Canada 7.24

Japan 6.60

Poland 5.87

United Kingdom 5.81

Australia 5.75

​Czech Republic 5.71

Turkey 5.61

Sweden 5.50

Switzerland 5.28

Netherlands 5.27

South Africa 4.92

France 4.64

Belgium 4.50

Romania 4.09

Italy 3.75

Spain 3.66

Portugal 3.39

Ireland 3.23

Greece 1.00



Source: Deloitte Touche Tohmatsu Limited and U.S. Council on Competitiveness, 2013 Global Manufacturing Competitiveness Index

In Europe, business leaders see only the continent’s intellectual property protection policies contributing to a competitive advantage for them from the 19 policy selection choices. At the other end, only three policies were cited by European business leaders as contributing to a clear disadvantage; they include labor policies, immigration policies and policies resulting in government intervention and ownership in companies.



So overall, the chunk of the countries in Europe are not very competitive among the G7​ countries...



Europe competitiveness is still a wish ...​​

EU Unemployment : Titanic in Perspective

( From ​Bloomberg, Haver, BondVigilantes, TestorteronePit, Quartz, Pictet , Sober Look, Gulf News, Zero Hedge, The Atlantic, Boston.com, Eurostat, Fox News, UPI, Globe and Mail, New York Times, The Telegraph, Business Insider, Trading Economics, Destatis, DW, Fox Business, Sober Look, Econoday, BrokenMarkets, Philippe Waechter, Trading Economics, The Monitor )

Poor Competitveness

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But back to the ability of France to grow its way out of a fiscal hole. Competitiveness is something that continues to worry us about the economy. The French current account is sharply in deficit, looking more like Spain or Italy than the “core” of Germany or the Netherlands (but not looking as bad as the UK’s current account deficit of 5.4%, the most important reason we think that the pound is massively overvalued).

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In a typical economic model, a country with a current account deficit like this would devalue its currency to help its exporters. The single currency zone of the Eurozone doesn’t allow this to happen, so instead an internal devaluation has to occur instead. Since the creation of the single currency, the German economy has outperformed, with strength in exported goods leading that strength. This was no accident – post the collapse of the Iron Curtain, German companies had come to agreements with trade unions (a kind of neo-corporatism in which the government, companies and workers are social partners in a capitalist framework) to have wage restraint and thus keep German manufacturing from heading east to the cheaper labour supply. It meant that in the 12 years since the creation of the single currency, German labour costs rose by less than 25%. In Greece they rose by 65%, Spain 55% – and in France by 40%. Relative to Germany then, French labour costs had risen by 15% more, a significant deterioration of relative competitiveness within the core of Europe

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​It’s clear that the “internal devaluation” is occurring in Greece and Spain, with labour costs falling sharply (as unemployment rockets). I’m not arguing this is positive – in the medium term it will stimulate exports as factories relocate in lower cost regions, but in the nearer term the drag this will have on Spanish and Greek growth could be medicine that kills its patient. But if there is capital to invest in plant, equipment and people in Europe once, and if, uncertainty fades, would it go to France, or to lower cost, restructured Spain?



And aggressive, publically stated austerity doesn’t appear to be a policy with great results – look at the UK where we’ve done less than 10% of the spending cuts that the coalition have planned, yet the psychological impact on the economy has been severe, and since the credit crisis began the UK economy has underperformed not just the US (where they did some good old Keynesian fiscal stimulus) but also the Eurozone, which is widely regarded as an economic disaster area here despite it having outperformed us by about 2% of GDP over the period (and having a lower debt/GDP level too, if you took the region together as a whole).

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Concerns



Economic fragility

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​EU s economic foundations are cracking. Unemployment hit 12.0% and is incessantly rising. The private sector is becoming comatose. Car sales sank 13.9% in 2012, from a lousy 2011. Fiscal austery is getting worse and for the rich, the climate has become hostile, the rhetoric poisonous.

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Conclusion

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So for EU as a whole, a mix of ​Weak Growth, Poor Competitiveness, Fiscal Tightening and huge youth unemployment make the recipe for a continuity of weknesse going forward. A kind of Perfect Storm looming...



More budget cuts will only accelerate the downturn like what happened to Greece and Spain...​​

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Here is a breakdown of unemployment across Europe and the eurozone



While economists had expected a decline in the fourth quarter, they did not expect it to be quite so big. The disappointing data call into question the timing of a recovery that was supposed to begin later this year. And the figures put pressure on government budgets that are already stretched, because tax revenue automatically falls if companies and workers are earning less.



Almost every one of the euro zone’s 17 members suffered a drop in output, measured as gross domestic product. In the three biggest euro economies, G.D.P. fell 0.6 percent in Germany, 0.3 percent in France and 0.9 percent in Italy.



A sharp fall in exports from the region’s trading hub caused the larger-than-expected decline, as official figures showed that the eurozone as a whole slumped 0.6pc in the quarter, the worst performance in over three years.

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​Total output in the euro zone remains 3 percent below its level in 2008, when the financial crisis began. Unlike Canada and the United States, the GDP of the euro area is smaller than it was before the financial crisis. With unemployment high, credit tight and government spending limited, there is little reason to expect significant improvement. ( See graph below )

The Situation



​Unemployment in the 17-member eurozone reached a record 12.0% in February 2013, stable compared with January. The EU27 unemployment rate was 10.9%, up from 10.8% in the previous month. In both zones, rates have risen markedly compared with February 2012, when they were 10.9% and 10.2% respectively.

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​​Eurostat estimates that 26.338 million men and women in the EU27, of whom 19.071 million were in the euro area, were unemployed in February 2013. Compared with January 2013, the number of persons unemployed increased by 76 000 in the EU27 and by 33 000 in the euro area. Compared with February 2012, unemployment rose by 1.805 million in the EU27 and by 1.775 million in the euro area.

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​ The increase was not a particular surprise given that the eurozone economy as a whole is in recession and expected to continue to contract in the first half of 2013.



The overall rate masks huge divergences though. While Greece and Spain languish under the weight of mass unemployment of over 25 percent, economies like Germany are operating with relatively low levels around the 5 percent mark.



​​Between February 2012 and February 2013, the unemployment rate for males increased from 10.7% to 11.9% in the euro area and from 10.1% to 10.9% in the EU27. The female unemployment rate rose from 11.2% to 12.0% in the euro area and from 10.3% to 10.9% in the EU27.



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The Youth Problem

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In February 2013, 5.694 million young persons (under 25) were unemployed in the EU27, of whom 3.581 million were in the euro area. Compared with February 2012, youth unemployment rose by 196 000 in the EU27 and by 188 000 in the euro area. In February 2013, the youth unemployment rate was 23.5% in the EU27 and 23.9% in the euro area, compared with 22.5% and 22.3% respectively in February 2012. In February 2013, the lowest rates were observed in Germany (7.7%), Austria (8.9%) and the Netherlands (10.4%), and the highest in Greece (58.4% in December 2012), Spain (55.7%), Portugal (38.2%) and Italy (37.8%).

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Concerns



​​Weak EU Economy

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In the euro zone, the combined gross domestic product of the 17 countries shrank 0.6 per in the four quarter from the previous three months, and now has declined for five consecutive quarters. That followed a decline of 0.1 percent in the third quarter.

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And to compare, during the fourth quarter of 2012, GDP in the United States was stable compared with the previous quarter (after +0.8% in the third quarter of 2012). Compared with the same quarter of the previous year, GDP rose by 1.5% in the United States (after +2.6% in the previous quarter). Over the whole year 20123, GDP fell by 0.5% in the euro area and by 0.3% in the EU27. ( See graph below )

Weaker Exports



In a world where economy is growing slowly, EU Exports are getting weaker because of uncompetitiveness ( see below ) and currency war.​

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​While many of its austerity measures are clearly necessary, such action (combined with poor private sector competitiveness) is translating into a significant divergence in growth between Europe and the rest of the World.

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Fiscal Tightening



​​But while ordinary citizens have been crying for help since immediately after austerity was first introduced, now experts are joining the chorus, and warning that the kind of austerity policies currently enacted in southern Europe may not be working.



​​ "I think it is fairly safe to recognize that austerity policies have, at least so far, not worked," says Tim Vlandas, a political economy researcher at the London School of Economics. "This is especially true in Greece, where after significant overall reductions in fiscal spending, the debt level is as high and unsustainable as before."



Following in Greece's steps, where a depressed economy and worsening public finances are creating a vicious loop, is in fact the worst nightmare of most Italians. And while Italy is not in the same situation as its Mediterranean neighbor, "the austerity measures enacted by Italy have improved public finances only marginally, while contributing to a stubborn recession" according to Mr. Arrigo.



Data released last December by the Bank of Italy show in fact that, instead of contracting, the Italian government's shortfall had widened in the first 10 months of 2012 compared to previous years.

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"Cutting public spending in a downturn is always risky, but it is especially so when all of Europe is tightening fiscal policy at the same time. The principal reason why public deficits have risen across Europe is because private sector demand has contracted sharply," says Simon Tilford, chief economist at the Centre for European Reform, a London-based think tank.



"Put another way, fiscal deficits are the not the cause of the crisis but a consequence of it," he says, adding that "the European Commission grossly underestimated the impact of fiscal austerity programs of this magnitude."



And while Greece is currently going down a spiral dive of shrinking economic activity and increasing austerity, other countries have the opportunity to learn from such experience.

