A real mess

By R.A. | WASHINGTON

MARKETS could scarcely have done more on Friday to register their approval of the progress made in last week's EU summit talks. Equities skyrocketed and sovereign-bond yields tumbled on word of a tentative agreement to allow euro-zone-wide emergency funds to provide direct support to member-state banks. The rally continues this morning, for both equities and bonds. But while markets may continue to express their relief at last week's news, the outlook for the real economy looks increasingly grim. In fact, grim hardly does the situation justice.

The recession in the euro zone is getting worse. New data on manufacturing activity in June show a steady pace of decline in that month. As you can see at right, Irish activity is improving, but that's small comfort given its tiny contribution to overall euro-zone growth. Among large economies, the pace of decline moderated slightly in France and the Netherlands but accelerated in Italy, Spain and Germany (where activity touched a three-year low). Spain and Greece remain in depression territory.

Distressingly, the analysis from the chief economist at Markit, which produces the surveys, reads:

The Eurozone Manufacturing PMI suggests that the goods-producing sector contracted by around 1% in the second quarter, with this steep rate of decline looking set to accelerate further as we move into the second half of the year. Companies are clearly preparing for worse to come, cutting back on both staff numbers and stocks of raw materials at the fastest rates for two-and-a-half years.

Unsurprisingly, the employment picture continues to deteriorate. According to the latest figures from Eurostat, euro-zone unemployment ticked up again in May to 11.1%. Germany's unemployment remains flat despite manufacturing weakness, but Spanish unemployment is now 24.6% and over 52% of Spanish youths are unemployment. Across the euro area as a whole, the ranks of the unemployed topped 17.5m in May, nearly 2m more than a year ago and more than 5m above the level in early 2008.

Continued, to say nothing of intensified, recession will place strains on governments attempting to meet fiscal goals, on politicians attempting to keep the public's favour, and on banks attempting to stay solvent. With global growth looking increasingly anaemic, the euro zone can scarcely count on an export boom to save it (especially as the euro rallies strongly whenever the euro area takes a step back from the brink of disaster). The European Central Bank is expected to move toward easing at its upcoming meeting, but it appears to be far behind the curve. A move toward banking union is encouraging, but the real costs of poor crisis mismanagement continue to mount.