The Scary Side of Europe’s Economic Data

(Bloomberg Opinion) -- If you measure the strength of the euro zone economies using hard data like quarterly gross domestic product reports, things look pretty decent. But soft data is painting a gloomier picture.

Hard data looks backward. The latest soft numbers — think of consumer-confidence indicators, surveys of business executives about their planning for inventory, production and employment, along with their expectations for the business climate — reflect fear about the future.

Europe is worried about lots of things, including a chaotic British exit from the European Union, the U.S.-China trade war and its own faltering trade relationship with the U.S. Recently, worries for the future have gotten worse.

The probability that the U.K. will leave the EU without an agreement on their economic relationship, an outcome that could put both economies into a tailspin, went up with the resignation announcement of Prime Minister Theresa May and the strong showing of the populist Brexit Party of anti-EU militant Nigel Farage in European Parliament elections last weekend.

The U.S.-China trade war now looks like it will be a drawn out affair that could seriously damage Europe’s trade with both combatants.

The tougher the protectionist in the White House is with China, the more unsettling it is for Europeans. They fear that they may be in for the same kind of treatment from President Donald Trump, who continues to bang the table about too many German cars on U.S. roads and too few U.S. agricultural exports in European supermarkets.

It’s Europe’s bad luck that its fears are rising at the moment when it’s about to lose the calming presence of Mario Draghi at the European Central Bank. The ECB president is stepping down in October.

European leaders can ease the fears embodied in the weak soft data by putting a Draghi-type figure into the ECB chair.

But instead of focusing on that crucial appointment, the leaders are trying to assemble a politically anodyne, something-for-everyone slate of candidates for five top EU posts on the basis of nationality, gender balance, Eastern European complexities and other political considerations.

The French have two candidates for the ECB presidency: Bank of France President Francois de Villeroy-Gaulac and ECB Executive Board member Benoit Coure. Both are in the pragmatic Draghi mold.

One of the Frenchman is likely to head the Frankfurt-based ECB if Germany gets a top post in Brussels. If the French get a Brussels job, on the other hand, a Finn becomes a leading ECB contender.

That’s likely to be Erkki Liikanen, who is well liked, politically astute and a practical-minded ECB veteran. If you like Draghi, you’ll like Liikanen.

The candidate who stands furthest from the Draghi mold is the German Bundesbank President Jens Weidmann.  

Weidmann at the ECB would make a no-deal Brexit and other threats to the euro zone economy that much scarier because the German has been critical of interventionist ECB policies used to counteract financial disruptions, including the asset purchases known as quantitative easing.

Early estimates that second-quarter GDP growth will be subdued are undermining hopes that the strong first-quarter GDP number was signaling a rebound from last year’s slump and would carry over to the second quarter. Instead, continuing weakness in soft data implies continued weakness in the hard data down the line.

This is most clearly seen in the flash composite May Purchasing Managers’ Index for the euro zone, which was 51.6 versus 51.5 in April, barely above the 50-point standard for signaling neither expansion nor contraction. Manufacturing was slightly below 50, and services slightly above it. The ECB view is that the flash PMI estimate is forecasting continued subdued growth, which may be too optimistic considering recent developments in Brexit and U.S.-China trade.

European leaders will be missing a golden opportunity to reverse these trends and bolster economic growth if they choose the next ECB president based on internal EU politics instead of the candidate’s ability to calm fears.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Melvyn Krauss is a senior fellow at the Hoover Institution at Stanford University and an emeritus professor of economics at New York University.

©2019 Bloomberg L.P.

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