Central Perk: 20 feb. 2014

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Mish's Global Economic Trend Analysis

Child-Porn Scandal puts German Grand Coalition on Rocks; End of a "Glorious" Honeymoon; Broken Eggs
Ukraine Truce Ends Already;100 Dead, Kiev is Burning; Civil Uprising or Civil War?
Philly Fed Unexpectedly Back in Contraction; Weather Blamed Again

Child-Porn Scandal puts German Grand Coalition on Rocks; End of a "Glorious" Honeymoon; Broken Eggs

Posted: 20 Feb 2014 02:23 PM PST

Although there was huge popular support for a German Grand Coalition, the idea was never a good one.

Expecting the SPD/CDU mix to last is rather like expecting vinegar and oil to stay mixed. The two parties hardly agree on anything.

Broken Eggs

You can get vinegar and oil to mix if you break a few eggs in the process. But broken eggs, like broken egos do not make a good political mix.

Child-pornography revelations triggered this coalition crisis, but the trigger could have been anything. Regardless, trust and cooperation between CDU and SPD just flew out the window.

Eurointelligence comments from a week ago, and again from today, will fill you in on the sordid details.

Eurointelligence February 13

The German grand coalition government is less than 100 days old, but has its first big political scandal, which already saw the resignation of a senior minister in Angela Merkel's cabinet. We had originally hoped to spare you this sordid story, which began with revelations of a child-pornography material allegedly purchased by an SPD MP, who has subsequently resigned.

That would normally be the end of this story. But small scandals become huge when mishandled politically – which is exactly what happened here.

The investigation into the scandal fell in the middle of last year's coalition negotiations. The former interior minister, Hans-Peter Friedrich, leaked information of the investigation to Thomas Oppermann, a senior SPD politician, who then contacted the chief of Germany's federal police force to extract further information. The overriding goal of both parties at the time was to keep the lid on the scandal and to prevent it from blowing up in the middle of the coalition talks.

When the details leaked out, Friedrich, who later became agriculture minister in the new Grand Coalition, was forced to quit by Merkel. The CSU, of which he is a member, is now seeking revenge, calling for the resignation of Oppermann, who has since become the SPD's parliamentary leader.

There is now a question mark over Sigmar Gabriel, SPD party leader, and what he knew. There is also the allegation that the suspected pedophile MP may have received advanced warning of the investigation so that he had time to delete all the incriminating material.

Eurointelligence February 20

With events unfolding in the Ukraine, the German grand coalition crisis was pushed a little into the background. It has now became an affair of state – so we are going to briefly summarise what had happened:

What we know is that the former interior minister Hans-Peter Friedrich made a phone call to Thomas Oppermann, who was then SPD parliamentary treasurer, during last year's coalition negotiation. In this call, Friedrich told Oppermann about a child pornography investigation against SPD MP Sebastian Edathy. The reason for this call was that Friedrich, a member of the Bavarian CSU, feared that this case could blow the negotiations. So he decided to break the law and leak the information of an ongoing criminal investigation. Friedrich later became agriculture minister in the Grand Coalition, and was forced by Angela Merkel to resign after the news of the phone call leaked out. Friedrich thus became the first political casualty of the case. The CSU wanted a eye-to-eye type sacrifice from the SPD. Oppermann, who has since advanced to become the SPD's parliamentary leader, has come under immediate fire.

Expect this affair to run and run.

German Grand Coalition on the Rocks

Wolfgang Münchau, (whose solutions I generally strongly disagree with, but whose insight as to what is happening is generally very good) has an excellent column on the Edathy affair in today's Spiegel.

Via translation from German, please consider Who Fails in Edathy, also Cannot Save the Euro

Edathy the affair is of great interest in terms of crisis management. It shows that the German government can not cope with complex tasks.

When rulers are under very great pressure, they behave like frightened chickens and prone to knee-jerk reactions. The affair also shows that there are no controls.

If you really need a well-functioning grand coalition, also at the European level, then the time is right now. Lack of a well-functioning coalition threatens even more hardship when the European recovery is weaker than expected with everything built on sand.

One of the basic evils of this coalition is that there is little substantive similarities. The Union tolerates without enthusiasm the program of the minimum wage and pensions at age 63. It tolerates the coziness of the Foreign Minister to Russia.

Everyone does his thing here. Angela Merkel sits above this constellation without her own ideas. Politically, this is a fragile construct.

I could well imagine that a recurring euro crisis would shake up the grand coalition. One of the lessons of our economic crisis is that and moods, reinforce each other - in both directions. The euro crisis was a sudden become known indebtedness in Greece triggered. One country after another followed. And then it was suddenly over.

The trigger for the turnaround was the announcement by Mario Draghi, that the European Central Bank (ECB) would be ready as a buyer of last resort. The situation improved because everyone believed in it.

As nothing objectively has changed on the debt, the crisis will someday return.

There are enough potential triggers.

Something may go wrong within the next year in Greece. Or the new head of government Matteo Renzi will fail just like its predecessor - and the anti-European forces will prevail there.

A fairly probable threat would be Europe slipping into deflation or a belated policy response in the face of high unemployment throughout southern Europe. It could also be a gradual political process.

Possible triggers are plenty. Anyway, it is extremely unlikely that the good mood the past six months, given the realities of the euro area can be maintained indefinitely.

If a grand coalition Germany wants to maneuver through this swamp, they would need a degree of cohesion, trust, competence and sincerity. The Edathy affair is not important for its own sake. It shows us that this government is not up to complex tasks.

End of a "Glorious" Honeymoon

Commenting on Münchau, Eurointelligence added ...

In his Spiegel column Wolfgang Munchau writes that this affair marks the end of a glorious honeymoon for the Grand Coalition. The fundamental problem is that this coalition is all about appearances. They disagree on almost everything. They have no joints projects. They reluctantly tolerate each other's programmes (like the SPD's minimum wage proposal). Considering the kind of economic policy stress this coalition is very likely to confront in the next four years, this affair does not forebode well for the future. More resignations are certain in this case. There is going to be a lot of political blood on the carpet, together with a general loss of trust.

If the grand coalition survives, it will do so only in name. There was nothing "grand" about it before, and this scandal will heighten mistrust and lessen cooperation, just as Europe heads for deflation, political pressures in Italy are on the rise, and France is on the verge of a severe economic pullback.

For further discussion, please see Deflation Will Return: Europe First, Then US; Global Supply Arbitrage.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Ukraine Truce Ends Already;100 Dead, Kiev is Burning; Civil Uprising or Civil War?

Posted: 20 Feb 2014 11:51 AM PST

Shortly after I wrote Spotlight on Ukraine: Riots in Kiev, EU Weighs Sanctions, Emergency Meetings; Fear of Default Contagion Spreads, the government negotiated a truce with protesters.

The truce lasted all of a few hours. The Financial Times reports Kiev truce ends in violence and gunfire.

Deadly clashes between anti-government protesters and riot police erupted again in the Ukrainian capital Kiev on Thursday, despite a truce announced hours earlier, with 70 demonstrators dead from gunshot wounds.

Each side accused the other of firing live ammunition, just hours after Ukrainian presidential officials and opposition political leaders claimed to have called a truce late on Wednesday.

The latest deaths take the number of people killed in Kiev since Tuesday to nearly 100, with hundreds more injured.

The escalating street battles cast doubt on the prospect of a peaceful resolution to pull the country away from the brink of a widening civil conflict, despite international diplomatic efforts to broker a settlement.

Civil Uprising or Civil War?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Philly Fed Unexpectedly Back in Contraction; Weather Blamed Again

Posted: 20 Feb 2014 09:55 AM PST

The Philadelphia Fed Bloomberg Consensus for the Philly Fed manufacturing index was 9.4. The index came in -6.3.

Highlights

The Philly Fed's headline index for general conditions fell back into the negative column, to minus 6.3 vs January's 9.4. This is the first negative reading since May.

Last month's big 7.8 point decline in the new order index signaled the trouble for today's report. And new orders are even worse for February, in negative ground at minus 5.2 for a major 10.3 point decline. Unfilled orders are also in negative ground, at minus 2.6 for a 1.6 point decline from January.

Shipments, suffering from a lack of orders and also from weather effects, fell dramatically, down 22 points to minus 9.9. The weather effect is evident in delivery times, which slowed 5.7 points to 2.9.

Weather is a temporary effect and isn't holding down the longer term outlook in the sample as six-month readings are all strongly positive led by a 6.8 point gain for general conditions to 40.2.

The Philly Fed report doesn't usually cite commentary but it does for February, saying respondents attributed much of the month's weakness to severe winter weather. But January also was hit with severe weather.

Philly Fed Diffusion Index

Chart from the February 2014 Philly Fed Report

Manufacturers Optimistic

Special questions show manufacturers are generally optimistic looking six months ahead.

Over 45 percent of the firms characterized the demand as increasing, while 19 percent indicated it was decreasing. The largest percentage (43 percent) indicated that demand had increased modestly. Firms were also asked to provide estimates of production growth for the first quarter. Significantly more firms indicated that production would increase in the first quarter (55 percent) than indicated it would decrease (28 percent), and the average growth for the reporting firms was 0.5 percent. Over half of the firms indicated that production growth would represent an acceleration compared with the fourth quarter.

Firms also remain optimistic about the growth of overall manufacturing activity for the next six months. This month, the future general activity index increased 6 points, from a relatively high reading of 34.4 in January, to 40.2 . Indexes for future new orders and shipments also remained at relatively high levels, with nearly half of the firms expecting increases in both over the next six months. The future employment index was virtually unchanged at 16.5, with nearly 27 percent of the firms expecting increased employment over the next six months.

Expectations nearly always exceed reality.

Unexpected Happens Again