An improvement in growth for the European Union and a renewed willingness to buy government debt in the distressed periphery has us clapping our hands in admiration at the turnaround the region has achieved in just the last 12 to 18 months.

The rot was stopped in the summer of 2012 around the time of EU President of the European Central Bank Mario Draghi’s statement that the bank would do whatever it took to keep the euro together and fund those states that were all but closed off to international credit marks at anything like a sustainable borrowing rate.

But according to an FT article, even the International Monetary Fund does not believe Europe is out the woods and, put simply, is just one negative shock away from outright deflation.

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What exactly is the problem?

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Read the first part of this post here

Would the US, Britain, or Japan change policy at the request of foreign powers because the foreign powers were, relatively, not doing as well? I don’t think so, especially if that meant lower support for exporters and industry, stoking inflation, and boosting internal consumption when the economy already has the lowest unemployment rate in Europe.

The villain here is not Germany, but the Euro. Arguably, if Germany left the Euro, one could see some immediate corrective swings occurring. Germany’s new currency would rise dramatically against the “new” Euro, and the remaining Euro countries would benefit from a massive devaluation in their currency, boosting competitiveness.

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Unfortunately, there would be no one to fund the hundreds of billions of dodgy loans and outright debt the area is saddled with. Because what is oft overlooked is the fact that Germany has been the largest contributor to the European Stability Fund and the European Central Bank. German guarantees supporting the existing bailout fund amount to €211 billion ($285 billion). The ESM will require a capital contribution from Germany. If the ESM lends its full commitment of €500 billion ($675 billion) and the recipients default, Germany’s liability could be as high as €280 billion ($378 billion).

As the FT points out, the size of these exposures is huge in relation to Germany’s GDP of around €2.5 trillion, and German household assets estimated at €4.7 trillion. Nor is Germany without its own problems. It has substantial levels of its own debt (over 80% of GDP), an ageing population, and deteriorating dependency ratios, to compound its problems.

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No wonder Germany suggested taking over the running of the Greek economy early in 2012. They wanted to be sure a major default didn’t start a domino effect that would end at Germany’s doorstep.

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Some American business folk look at Germany’s industrial policy with a little envy. Germany, it seems, is willing to do just about anything to support its manufacturing industries and the benefits are plain to see. With a vibrant manufacturing sector exporting around the world, it doesn’t get any better than brand Germany when it comes to machine tools, manufacturing equipment, automotive technology, and much else.

At the same time Germany is often looked upon as one of the good guys, respecting intellectual property and international law, while leading Europe out of its mess of debt and incontinent tax collection with fiscal responsibility. But not all would agree.

Paul Krugman, the influential Professor of Economics and International Affairs at Princeton University, is well known for his liberal views on trade and international economics. His view of Germany is somewhat different from the above, as he recent opined in a NY Times article.

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In Krugman’s view, Germany has taken the place of China as the current account running bogeyman of the world economy. For one, Germany has overtaken China as the running the world’s largest current account surplus; both in absolute terms and in terms of a share of GDP, it is twice China’s. That alone Krugman views as bad enough. One country’s surplus is another’s deficit, he says, and he notes that Germany has been running a surplus for a decade, but earlier these were offset by equally massive deficits in many European countries.

Europe as a whole ran a small surplus with the rest of the world. Germany remains dependent on its neighbors, with 69% of total exports going to European countries, including 57% to the member states of the European Union. Of course, not all neighbors are equal. In 2012, Germany ran a trade deficit of €27 billion ($36 billion) with Russia, Libya, and Norway, mainly for energy imports.

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This is the second in a two-part series. The first part can be found here.

The IHS research quoted on 24/ reckons that high energy prices will cost the German economy 40,000 jobs in the chemicals sector by 2030 under one pricing scenario, while machinery and motor vehicle manufacturing could lose 85,000 and 87,000 jobs. Not only do solar and wind raise costs, they also reduce stability. The rising and setting of the sun can be predicted to seconds, but the intensity of light and KWhrs of power are less reliable. Wind is even worse, leaving generating capacity idle during peak demand one day but contributing the next. Under such circumstances, most countries ensure a base load of supply by maintaining low-cost always-on power sources such as nuclear or coal.

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The drive to renewables in Germany should run counter to maintaining a high dependency on coal, but (and some may say hypocritically) Germany has five new coal-fired power plants with a combined capacity of around 4 GW going through their “first fire” trials this summer. Although generators are at pains to stress how very efficient these new plants are, much of Germany’s coal-fired power production uses lignite, the dirtiest form of coal. Overall, Germany’s coal-fired power plants (including lignite) contributed more than 50% to the nation’s electricity demand in the first half of this year, with more coal-fired capacity likely to be commissioned before the first nuclear plant is taken out of service in 2015, Platts tells us.

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Germany has long been admired for its economic achievements. At our Commodity/PROcurement Edge conference last week, Nucor, one of our sponsors, spoke of Germany’s industrial success as being built on its model of long-term investment. Regardless of which party led the government, Germany maintained a focus on manufacturing and technological development as a long-term goal for its economy, a position not followed by its partners in the European Union, despite what they may say.

That focus has kept Germany as the second most successful exporter in the world, with an account balance of $208,100,000,000 in 2012– which is just a whisker behind China’s $213,800,000,000, according to the CIA Data Book. Germany is a world leader certainly in technological sophistication and quality, along with machine tools, automotive, chemicals, steel, and machinery. Its economy is the fifth largest in the world and by far the largest in the EU. And Germany has achieved this while having the lowest unemployment and highest standard of living of any major EU country, with the former at 6.5%.

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The German model has arguably been sustained in recent years by the formation of the single currency. If instead of the Euro, Germany still maintained the Deutschmark, the resulting strength of the mark would be causing immense problems for Germany’s export-led manufacturing economy, in much the same way as it is for Switzerland now and had been for Japan before they embarked on QE and currency depreciation. But these speculations miss the point, as Germany is part of the European Union, and if at times they seem reluctant to support their fellow members– whom their success in part depends on– who can blame them for not wanting to take on the rest of Europe’s debts? Read more

Continued from Part One.

According to the Telegraph, over 100 German ship funds have already shut down as the crisis in global container shipping comes to a head, while 800 more funds are threatened with insolvency, according to consultants TPW in Hamburg.

In the UK, Britain’s oldest ship-owner, Stephenson Clark, dating back to 1730, went into liquidation this month, closing the final chapter of Britain’s coal trade and the industrial revolution, citing “incredibly depressed” vessel rates. Like large parts of the German container industry, the firm over-invested in the boom four years ago, betting too much on Asian growth rates.

Germany, however, is said to be the superpower of container shipping, controlling almost 40 percent of the world market; so if collectively they get it wrong, it goes wrong in a big way.

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The Baltic Dry Index (BDI) usually steals the headlines when it comes to discussion of the world’s shipping fleets, and is often quoted when analysis of the global economy refers to international trade.

The Dry Index is a measure of bulk shipping rates and although the Baltic Exchange quotes a range of vessel sizes and types, it is often the large dry bulk carriers carrying iron ore, coal and grains that steal the limelight.

This is hardly surprising; the volume of such bulk commodities is a measure of global economic activity and the rates charged for carrying such commodities are in part a reflection of the level of demand or volumes. But not in total, of course: the supply of space also plays its part as is the case in the current market.

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Japan is facing an electricity crunch this summer, potentially so severe, that companies such as Komatsu, the world’s No. 2 maker of construction machinery, have said they will move factories overseas if electricity supply isn’t guaranteed.

Bloomberg reports that all but one of Japan’s 54 reactors are now offline after the March 11 earthquake and tsunami last year crippled Tokyo Electric Power Co.’s Fukushima Dai-Ichi nuclear station. The reactors, which previously supplied 30 percent of Japan’s electricity, have either been closed by the disaster, by government order or not allowed to restart after regular maintenance shutdowns. The remaining one reactor is due to close on May 5 for maintenance.

“Did You Pay the Gas Bill?”

As a result, Japan’s fuel import bill has sky rocketed. Liquefied natural gas imports rose to a record in 2011 as utilities have been forced to rely on fossil fuel power plants to replace idled reactors. Japan imported 1.75 million kiloliters of oil, or about 369,000 barrels a day, for power generation in February, more than four times as much as a year ago, according to data from the Ministry of Economy, Trade and Industry in a separate article, while imports for power generation were up 15 percent from January alone.

There seems to be a government-led imperative to get some of these nuclear plants back online as Kansai Electric, the utility most dependent on nuclear at 49 percent of generating capacity, warns it may fall nearly 20 percent short this summer. The company serves the Kansai area of western Japan that covers an area the size of Belgium, has an economy worth $1 trillion — about the size of Mexico’s — and is home to the cities of Osaka and Kyoto as well as factories of Sharp Corp. and Panasonic Corp., Bloomberg reports.

Bring Back Nuclear, They Say

Although much controversy remains, even some local politicians and the general public appear to be favoring re-starts as employment suffers in areas where plants dominate the local economies. Overseas reaction to nuclear energy post-Fukushima, however, vary. Germany still plans to close all its plants by 2020, and even in France questions are being asked about expansion to what is one of the world’s most comprehensive nuclear generating networks.

But emerging markets are still showing enthusiasm for nuclear power as a secure provider of low greenhouse gas-emitting base-load electricity.

In Turkey, China is said to be close to securing a contract to finance and build a plant on Turkey’s Black Sea coast, in spite of the Chinese touting older technology. China is developing newer technologies off its own back as it is prevented from poaching the technologies of Westinghouse and Areva, who are constructing plants for the Chinese in what is currently the world’s largest nuclear construction program — but don’t be surprised if the Chinese “discover” very similar solutions to the technical challenges solved by Western firms.

Meanwhile, Turkey already has another plant planned with a Russian manufacturer, and Russia’s Rosatom is said to be keen to bid for the construction of two plants in the UK’s program of plant replacements, according to the Telegraph. It would seem that while many countries share Japan’s safety concerns, the cost associated with the alternatives — whether they are self-inflicted by Co2 emission targets or real ones such as import bills – mean nuclear remains a viable alternative if not an outright necessity.

Outside of Europe, the Netherlands is often overlooked in the debt crisis debate and analysis, largely because it lacks the GDP of other core countries — $780 billion as compared to Germany’s $3.28 trillion and France’s $2.56 trillion. (Even Spain at $1.41 trillion and Italy at $2.01 trillion are considerably larger.) But the Netherlands is also overlooked because of its relatively small landmass and population.

It is a mistake to dismiss the Dutch as peripheral to the workings and future of the EU. The country punches well above its weight both economically and, more importantly, politically. In the halls of EU power brokers, the Netherlands has been a keen advocate of austerity, a natural extension of its Germanic approach to hard work and fiscal conservatism — a doctrine that has served it well over the years, achieving a high standard of living and a pivotal role as the entreport to the industrial heart of Europe.

So the recent political crisis faced by the Liberal-led coalition in the country is all the more intriguing for what it tells us about possible futures for the European Union.

Where the Netherlands Economy Stands

The Netherlands has slid into recession this year, resulting in a sharp rise in its projected 2013 deficit to 4.6 percent. At the same time, the spread between Dutch and German 10-year bonds has risen over 20 basis points as the markets have worried the country may lose its triple-A rating, a fear heightened by the political deadlock.

The crisis is about how to bring that down to the 3.0 percent target, which the country has been at the center of insisting other European states should aim for. Although the Netherlands has led by insisting Greece, Portugal, Ireland, Spain and Italy must adopt harsh austerity measures if they are to qualify for any support, nevermind bailouts, the government cannot now agree on how to bring its own house in order.

A row between the Liberals and the far-right Party for Freedom (PVV) means the government is short on votes needed to push reforms through, even after three weeks of secret talks. A report by the “Euro-sceptic” (as the FT put it) research group Lombard Street, a UK consultancy, is probably not helping things.

Will the Netherlands Leave the Euro?

The FT states the report was prepared for the PVV and is pessimistic about the euro-zone’s future. Under its worst-case scenario that Greece, Portugal, Italy and Spain all have to leave the euro-zone after failed bailout attempts, it concludes that the Netherlands would save €120 billion over three years if it left the single currency now bolstering the PVV’s antagonism toward cuts, which would not be necessary if the country was not part of the Euro.

The report painted a bleak future for European core countries Germany, the Netherlands, Finland and probably France, saying austerity programs and internal devaluation would be unable to restore peripheral European economies to competitiveness, meaning the euro-zone would become a transfer union.

Will the Netherlands drop out of the Euro and go it alone, as the report recommends? No, almost certainly not, but the very fact such hard-line positions are holding any credence in the Hague underlines how troubled the core states are at the almost inevitable prospect of them having to fund bailouts in southern states for years to come.

Image source: Business Insider

Continued from Part One.

In the autumn of 2010, the International Monetary Fund thought Greece would shrink by a rather modest 2.6 percent in 2011. We now know the economy last year fell about 7 percent. The Greek fiscal position was bad not only because of a lack of effort, but also because the economic problems were far stronger than expected; the fear is that with 25%+ unemployment and a severe economic squeeze just starting, Spain will contract more than expected. Major deficit reduction in the wake of economic collapse is near enough impossible, the FT suggests, yet the more Spain resists deficit reduction, the greater the eventual scale of the problem will be.

An article in the Independent postulates a third cause for concern among investors, which unfortunately runs counter to the previous positions; namely that austerity, demanded by the EU, is driving the Spanish economy further into the mire and making the need for a rescue (which the EU might not be able to afford) all the more likely.

The problem is Spain cannot address both fears. They either implement austerity measures to satisfy conventional wisdom and their EU paymasters, or they try to reduce debt via growth, which essentially involves stimulating the economy – almost impossible to do while simultaneously reducing government spending and trying to balance the books.

As with Greece, Germany is claiming that the existing facilities are sufficient, but it may be, just as with Greece, that the market has other ideas and that in order to avert a run on Spanish debt, eventually the richer northern states will have to stump up a bailout for Spain as they did for Greece.

The scale of the problem, however, is on a whole different magnitude with Spain.

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