Belfast Telegraph

Eurozone crisis has left the politicians floundering

By Hamish McRae

The information flow from and about Europe is too relentless, too wall-to-wall, too intense, too confused. This makes it hard to sort out what is new and significant in both the data and statements of the officials and politicians.

As far as the flow of numbers is concerned, it is easy enough. It is obviously better to look at forward-looking data, such as purchasing managers' indices and surveys of consumer sentiment, rather than stats that are already out-of-date when they are published.

And when numbers feel wrong - they don't square with what businesses and shops are reporting - then they usually are wrong and are subsequently corrected.

I don't think much has changed in that regard, except for two things. One is that we really should look at global data, data that encompasses the emerging countries, rather than what is happening in the old developed world. For example, I saw the other day that China and India between them are likely to account for some 60% of the increase in global output next year.

And the other thing is that the plight of the eurozone has meant that we should look at numbers that we used not to bother about. I don't mean just the bond spreads or the calculations about the chances of a country defaulting, fascinating though those are.

There are huge flows of money between the eurozone banks that have been under-publicised: money walking out of the fringe countries' banks and into Germany. It takes a move such as was announced yesterday by Mario Draghi, the new president of the European Central Bank, to supply unlimited cash for three years to European banks to make one realise quite how gummed up the eurozone banking system has become.

As far as flow of words is concerned, so much rubbish has been spouted by politicians and officials in recent months that it is very hard to take anything seriously.

But as a rule-of-thumb anything said by Mario Draghi and to a lesser extent Angela Merkel does matter. The ECB is the only body holding together the eurozone at the moment. It is in effect the financial government of Europe. All it can do is set interest rates and print money, but that is all it needs to do to keep the eurozone functioning in the short-term. So it cut rates, as expected, while Dr Draghi's pledge on cash for the banks is not a statement of his view but a very important change in policy. So it matters.

Angela Merkel matters but in a different way. Germany may not be strong enough to save the euro but without Germany's creditworthiness backing it the euro is dead. But she is a politician accustomed to moulding and nudging German public opinion; managing a continental currency is beyond her experience. So while there will be some sort of deal at the European summit that on the surface looks credible, the scale of the task ahead is beyond anything that has been attempted before.

And the words of other European politicians? Totally unimportant. What is happening in the eurozone is beyond their experience and competence. Enough about what words to trust; what of the data we should trust?

Well, the purchasing manager surveys are really the best place to start and I'm afraid they do suggest that the eurozone economy is heading back into recession.

A majority of firms in the eurozone now expect contraction, whereas in the US and, somewhat surprisingly, the UK, a small majority still expect growth to continue. The divergence of views between the eurozone on the one hand and the US and UK on the other is sharper now than at any time since the recession.

The question is whether we can trust consumers to keep spending in the light of this deluge of adverse economic comment. I cannot give a good answer, except to observe that US consumers are reasonably buoyant and here, while consumption has been flat for most of this year, it has not fallen off a cliff. Given the dismal stuff heaped on the British consumers in recent weeks, they should take a bow.

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