Came across the Markit PMI Manufacturing Output Index today (with a hat-tip to FT’s Money Supply blog), which showed the Eurozone as a whole was expanding (although I’d characterize that expansion as “nascent”, personally). You can see from the first chart that there has been a bounce, for sure:
I would still call it nascent simply because the recovery in Europe has had the same traits ours has had: an overabundance of liquidity provided by central banks, government stimulus, government intervention, period. So until the government takes the crutches away, forgive me if I sound a bit skeptical.
Then I saw this chart and one country stood out and not in a good way: Spain.
To quote Chris Farley, “that’s gonna leave a mark.” Even Italy, another of the PIIGS, had a stronger reading.
The problem with Spain is they are the 4th largest economy on the continent, and then there’s that debt-to-GDP thing. You know, this one:
Without capital flows into the country, the only option they have is to pare back spending and learn to rely less on external financing. And the other thing they’ll have to rely less on? Construction/real-estate related jobs. Because we can already see what happened there:
Can they make the transition? Sure, with enough budget-cutting and if there’s a competitive advantage to be had there. But nobody should be fooled into thinking it will be done overnight. This is a process that takes years. I mean, how does an ocean liner change course? Slowly.
But the longer it takes them to start, the longer it will take to finish. And given their debt-to-GDP problem, they may not have the time they think they have. If the debt load they are carrying is seen as unsustainable, then there’s the specter of Brussels getting involved (like in Greece’s case), and a fresh reason for an assault on the Euro. I’m surprised it has taken this long to get to this point, but I guess I’m just a little more sensitive to these issues than others.
Either way, the best way to confront this is head-on. Because you can only keep delaying the day of reckoning for so long.