German Public Opinion

Many commentators assume that Europe’s fiscal and monetary bailouts will eventually come up against a hard limit of how much the German people will accept. I am sceptical of this notion — taking political constraints as given has been a consistent mistake of commentators on the European situation. An article in The Economist ( this week cites opinion polls that suggest that Germans are now supportive of Angela Merkel — following a dip in support over her mishandling of a plagiarism scandal and the nuclear question and also, one assumes, the European bailouts — and that they no longer see the European crisis as being about feckless Greeks, but rather about European stability. Talk of opposition to the bailouts from within Merkel’s CDU has apparently abated. Moreover, the party that has taken the most Eurosceptic line — Merkel’s coalition partner the FDP — has seen a large fall in its support. This all makes me more sceptical of the idea that German politics could become a binding constraint that could prevent Europe from clawing back from the abyss.

Contra-cyclical Fiscal Policy Banned in Europe

25 of the 27 EU states have signed up to a fiscal compact that will limit government deficits and thus enforce pro-cyclical fiscal policy in the EU. As I understand it, unlike the old Stability and Growth Pact (which was flouted by, among others, Germany), the fiscal compact will be written into national laws and will therefore be binding on governments. Ratification of the agreement has, at German urging, been made a condition of future bailouts under the ESM, which the meeting also agreed to set up (in July 2012, to run in parallel with the EFSF for a year, and with EUR 500m of lending capacity). The idea of this is to bully the Irish into voting “yes” if they have to have a referendum on the new treaty.

If this all sounds utterly idiotic, then that is because it is. But given that the Germans are determined to impose their idiocy on everyone else before they will sign up for further steps towards a fiscal solution to Europe’s crisis, and given that progress towards a fiscal solution is probably necessary for the ECB to agree to continue with its ongoing monetary solution, we can interpret yesterday’s agreement as a signal that the immediate crisis, insofar as it concerns countries that the market considers to be solvent, remains in abeyance. In other words, Spain and Italy are probably safe from liquidity crises as long as they avoid solvency crises. Portugal appears to be heading for a solvency crisis, but the new European arrangements should be enough to prevent an unplanned default, and in any case Portugal is quite small.

Can this be a final fix for the European problem? In principle, yes. If Spain and Italy are prepared to accept years of austerity while German inflation very slowly restores them to regional competitiveness, and if they at least grow enough to keep their debt/GDP ratios from an upward path, then with the possibility of a liquidity crisis removed, the situation will eventually be resolved. I am not optimistic, however, about either condition. Spain and Italy are unlikely to accept years of austerity; and if they do, their debt/GDP trajectories may well rise as a result — as has happened in Greece and Portugal. However, I do think that one of these conditions will have to be violated before Spanish and Italian bond markets again become distressed, and thus I think another acute crisis episode is unlikely for at least a few months.

It is worth noting that this view assumes that the new agreement is implemented as planned. The Irish could still have to have a referendum, and thus could still vote “no”. And Sarkozy has said that French ratification is unlikely until after the French presidential election in April-May; Francois Hollande, his main challenger, has said that he would renegotiate the treaty.

Corn, Cobber?

Actually, more likely, wheat. Bloomberg reports ( that Australian farmland prices have fallen 20% on average, and up to 50% in some areas, since 2007. Foreign investors are taking an interest, and an analyst from Colliers has said that the firm thinks that prices have bottomed. However, Bloomberg also points out that it has been hard to get a good return on capital from Australian farms in the past, that huge farms are necessary because margins are low, and that 25% of farms make 85% of the industry’s profits — which all points to a high chance of losing money if you are an outsider buying in. Still, something to think about.


The lack of a recession (yet?) in the US and the Fed’s loosening and future loosening bias should reduce credit spreads in the US. At the same time, it is hard to be optimistic about corporate earnings in the context of a global slowdown, elevated margins and the most disappointing S&P 500 earnings season since 2009 (positive surprises ~60%, negative surprises ~30%). Thus the picture pulls both ways for equities. If I had to bet, I would bet on a further rally as credit spreads fall — any drop in earnings will take time to become evident, and it is only conjecture that earnings will drop at all. The picture does not pull both ways, however, for US corporate credit. As long as earnings do not drop precipitously and the probability of extreme macroeconomic outcomes continues to fall, monetary loosening should bring in US credit spreads. Sadly I do not have an easy way to play this idea in my small size.


  • Personal spending 0% MOM d.e. Dec.
  • Personal income 0.5% MOM b.e. Dec.
  • Personal saving rate rose to 4% from the 3.5% level it had held since September.
  • PCE on durable goods rose 0.1%, in line with my forecast on 5th January. This is a reasonably good leading indicator and I think a slide towards recession is unlikely as long as it continues to rise. There are reasons to fear a fall — particularly the end of a tax credit for vehicle purchases — but at present there are no data for the start of 2012. Vehicle sales for January, published in early February, will be the first indication of whether durable goods spending is holding up.
  • Japam PMI rose to 50.7
  • Japan household spending 0.5% YOY b.e. Dec. First increase since August 2010.
  • Japan unemployment rose to 4.6% d.e. Dec.
  • Japan IP 4% b.e. Dec.
  • UK GfK consumer confidence rose, b.e., still very low.
  • German retail sales -1.4% d.e. Dec.
  • French consumer spending -0.7% d.e. Dec.
  • German unemployment change was negative, b.e., Dec.
  • Italian unemployment rose to 8.9% d.e. Dec.
  • UK net lending to individuals was more depressed than usual in December.
  • UK M4 -1.4% d.e. Dec. The biggest drop on the chart (back to 2006).
  • Eurozone unemployment 10.4% a.e. Dec.