Europe turns negative on the Euro

[HenryTo]

Following article courtesy of the Sunday Times:
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The Sunday Times December 31, 2006

Non, nein, no: Europe turns negative on the euro
Matthew Campbell, Paris

A FRENCH diplomat who spent the festive period at his weekend home in rural France was astonished last week when a man in a DIY shop presented him with a bill in francs, rather than in euros, with the excuse: “I am sorry, monsieur, most of my clients prefer it that way.”

In a world apart from the euphoria with which 12 nations — excluding Britain — switched to the euro on New Year’s Day in 2002, hostility towards the single currency is growing as a wider malaise over an expanding Europe takes hold.



“I suppose in some places the euro has just never really caught on,” said the diplomat. “I feel very pessimistic about the future.”

Slovenia will drop its tolar tomorrow in favour of eurozone entry, but in “old Europe” the fifth anniversary of the introduction of the euro will be more an occasion for bitter reflection than fanfares.

The high denomination notes may be popular among criminals, but one poll released last week showed that 52% of French people believe that “the euro is a bad thing”, blaming it for inflation, and 57% felt that the euro had been bad for them “personally”.

A quarter of the population, it emerged, still calculated prices in francs, a process that the government has not seemed to discourage by requiring all receipts to display, alongside the euro total, the equivalent price in francs.

It might not matter if this disgruntlement were limited to rural French bakers who spit at the mention of euros: the French are in a peculiar mood, as they demonstrated most spectacularly by rejecting the European Union’s proposed constitution in a referendum last year.

More worrying to Brussels, however, was evidence that resentment of the euro was spreading to other parts of the empire. A majority of Germans, it turns out, also long to have their old currency back, according to another recent poll, because of inflation that they blame on the “teuro”, as they often call the euro in a play on teuer, the German word for expensive.

The Spanish and Irish seem relatively content with their lot but the same cannot be said of Italy, where 64% of people acknowledged feeling “little” or “not at all” at ease with the European currency, which they blame for higher prices. Some politicians have called for the country to re-establish the lira to revive economic growth.

This was all a far cry from the “very great federating power” that Hubert Védrine, the former French Socialist foreign minister, imagined for the euro.

“It has not had the effect of an integration lever that its founding fathers dreamt of,” said the left-wing Libération newspaper in an editorial last week. “At a time when the European project has broken down . . . you have to be a Slovene to feel any enthusiasm about joining the eurozone.”

In Slovenia the opinion polls showed that the euro was still generally popular because it represented a final break with the communist past.

Yet even here there were fears about rising prices and other EU newcomers are hardly racing to the starting line. Hungary has abandoned its previous target of adopting the euro in 2010, and Estonia has decided to move its target entry date to 2010 from 2008, despite its economic success.

Those already in the club are hardly a good advertisement for it. By contrast with German angst about the euro, which is strongest among the least well-off, Gallic grumpiness with the euro system extends to the political classes that once trumpeted its virtues.

Various French politicians, including Dominique de Villepin, the prime minister, Ségolène Royal, the Socialist presidential candidate, and Nicolas Sarkozy, her most likely opponent from the centre-right, have displayed a populist streak by making the European Central Bank their favourite political punchbag as the presidential election draws near.

The bank’s officials last week seemed to take pride in the strength of the euro and news that the value of euro notes in circulation was this month likely to exceed the value of circulating dollar notes. There was similar satisfaction over Iran’s recent announcement that it would keep foreign reserves in euros rather than dollars.

For French politicians, however, the euro’s strength was to blame for making French goods too expensive overseas and hampering growth. This ignored a host of other factors, such as high French labour costs. However, it played well with an electorate terrified of being left at the mercy of market forces. It also highlighted the protectionist instincts of even supposedly reform-minded politicians such as Sarkozy, the son of a Hungarian immigrant, who has revolutionised French politics with American-style campaigning techniques and who likes to advertise himself as the candidate of “rupture” with the past. Like Royal, though, he was in favour of bringing the European Central Bank under politicians’ control.

All of this reflected a wider European malaise: rejection of the EU constitution has left Europe rudderless and adrift just as it is set to expand to 27 members next month. The inclusion of Bulgaria and Romania will make the EU more unwieldy than ever. But as Germany takes over the rotating presidency of the organisation this week the Franco-German axis, traditionally a motor of decision making in the EU, has never seemed weaker.

Angela Merkel, the German chancellor, has put more effort over the past year into repairing relations with America and befriending George Bush, its president, than she has into building ties with France.

[rffrydr]

And, so far, that's what most of the above amounts to. Remember the "Buy American" campaigns here in the early nineties? Now the cops ride BMW motorcycles and a little retailer called WalMart has become China's biggest customer! The euro is an easy target. But even with the breakdwon of expansionist EU on the shoals of Turkey, the Euro will probalby be around for a good while.

The Italians for instance: they may talk withdrawl but let's see how long they want to endure their 14% pre-euro bond rates and perpetual currency revaluations. I traded some Italian bonds once and the zeros went full across my statement!

Price differentials are still very much present and that doesn't count the uneven application of Taxes.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Sorry, didn't notice the post here.

If only measured by housing, BOE had to act. Britain had a softening market (as it was one of the first and more robust) but the City now rates the highest commericila prop in world, with NY Manhattan sixth behind, Aberdeen Scotland! Overall housing back on the rise too.

I think time is coming to short Persimmon.
_________________
Today is the Tomorrow you worried about Yesterday!

[Goodfella]

BoE hikes key repo rate 0.25 pct to 5.25 pct


LONDON (AFX) - The Bank of England has unexpectedly lifted its benchmark
rate a quarter point to 5.25 pct, its highest level since August 2001.
There had been some jitters in the run-up to the decision, because
rate-setters will have had December's inflation data in their possession, days
before their official release.
There were mounting concerns that the release would show CPI inflation
rising above 3 pct, which would mean the BoE governor Mervyn King having to
write a letter to Chancellor of the Exchequer Gordon Brown explaining why
inflation had risen so far above the 2.0 pct target.
If a letter was pending, then a hike could have been easily justified, said
Geoff Dicks, economist at the Royal Bank of Scotland, ahead of the release.
"It would be a very human, risk-averse, response to the news that next
week's inflation data are a 'shocker' to raise rates today," said Dicks, who is
forecasting a 0.2 percentage point increase in the annual rate to 2.9 pct
reflecting the 1.25 pence a litre rise in fuel duties in December 6 pre-budget
report.
Yesterday's shop price index from the British Retail Consortium further
fuelled concerns that the inflation spike in December may be even higher than
anticipated.
The BRC said shop prices were 2.3 pct higher in December than the year
before, up from the 1.8 pct recorded in November. The December rise was the
highest since March 2004.

[HenryTo]

Despite the most recent decline (a decline back to its pre-Thanksgiving level), folks in France are still very much against the ECB and the Euro:
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French election fever fuels euro backlash
The Associated Press Published: January 10, 2007

PARIS: Whatever French honeymoon the euro may have enjoyed, it's over.

With elections looming, France is leading a backlash against Europe's eight-year-old monetary union and the hard currency that has crowned it since Jan. 1, 2002.

Five years after the euro-themed New Year parties — which quickly gave way to gripes about prices that were not borne out by inflation data — opposition to the currency is hardening in many member states. The euro is increasingly blamed for a range of economic woes, surveys show, from weak exports to the offshoring of jobs.

Taking their cue from the 2005 referendum in which French voters torpedoed the EU's draft constitution, French politicians of all stripes are now training their periscopes on the European Central Bank and its French president, Jean-Claude Trichet, in the final months before the presidential and legislative polls. Their main complaint: The ECB is too independent.

"It should no longer be up to Mr. Trichet to command the future of our economies, but rather up to leaders designated by the peoples of Europe," Segolene Royal, the opposition Socialists' presidential candidate, said last month.

Today in Business

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China's 2006 trade surplus jumps 74 percentRoyal, whom polls show to be neck-and-neck with the main contender on the right, Interior Minister Nicolas Sarkozy, is not alone in suggesting that the bank should not be left to set euro-zone interest rates on its own, free from political pressure.

Sarkozy, a former finance minister, surprised economically liberal supporters when he suggested last month that the ECB's jealously guarded independence should not prevent monetary policy from being placed "at the service of a powerful economic policy."

While stressing his support for the common currency, Sarkozy argues that its strength against the U.S. dollar and other currencies has made French labor less competitive and caused jobs to be transferred abroad. "If we carry on like this, we won't be able to make Airbus planes in Europe any more," he told a gathering of party faithful in northern France.

Sarkozy castigated the ECB for failing to consult with politicians. "Independence is one thing, refusing to enter into a dialogue is another," he said.

The ECB has raised its key refinancing rate from 1 percent to 3.5 percent since December 2005, keeping euro-area inflation firmly under control but, critics say, stifling economic growth and propelling the euro to economically damaging heights. The bank's governing council is expected to leave rates unchanged when it meets Thursday in Frankfurt.

French President Jacques Chirac, who is thought unlikely to stand for re-election in April, also took a swipe at the ECB last week. Europe needs "an active exchange rate policy, like those of the United States, Japan or China, that works not only to combat inflation but also for growth and employment," he said in his New Year message to diplomats.

A majority of the French public has swung against the euro, according to a poll published last month. Some 52 percent of voters now believe that giving up the franc had been bad for France, pollsters TNS Sofres found. The survey questioned 1,000 people, suggesting an error margin of plus or minus 3 percentage points.

"The euro is a complete disaster," said Monique, a 63-year-old housewife out shopping Wednesday in northeastern Paris, who preferred not to give her surname. "Things cost so much more than they used to, and who wanted it in the first place? It was the government. They didn't ask our opinion."

But Jean-Claude Connac, who runs a small cheese shop in the same neighborhood, said the common currency's impact was "positive overall," even though it led to higher prices. The euro has boosted trade within Europe, and its current strength has benefits as well as drawbacks, he said, citing lower fuel prices. "With the franc, we weren't very well positioned against the dollar."

The introduction of euro notes and coins did produce some price increases — especially for small, everyday purchases — as storekeepers, cafes and vending machines rounded up for convenience. But official data show that overall euro-zone inflation actually fell in the year that followed.

The European Union's own survey found that public support for the euro declined over the 12 months to September in nine of the 12 countries that rolled out euro notes and coins in 2002. The 13th member of the euro zone, Slovenia, began using the currency Jan 1.

In Germany, one of the prime movers behind the euro's creation, 58 percent of the population now want their old marks back, a separate poll found.

The ECB and its defenders are fighting back. The day after Royal's comments, European Commission President Jose Manuel Barroso told students at France's HEC management school that "it's thanks to the strength of the euro that our energy prices are bearable and our interest rates at historic lows — the necessary conditions for growth."

Trichet himself has toured European newspapers offering interviews in which he staunchly defended the euro and the ECB's independence. The euro zone's first 12 members saw 2.7 million jobs created in the eight years before the euro's introduction, he recently told EU lawmakers, and 11.7 million in the eight years that followed.

The Organization for Economic Cooperation and Development also warned in a report this month that the euro risked becoming a political scapegoat for problems caused by governments' failure to reform. Other ECB supporters point out that the stronger euro has not stopped German exports from recovering strongly.

One of the main problems, some economists say, is that the introduction of euro notes and coins coincided with the dot-com bust and the downturn that followed.

"We're not yet in a situation where governments are able to demonstrate the economic benefits of the euro," said Gilbert Koenig of France's National Center for Scientific Research.

Meanwhile, the temptation to blame the ECB will not get any weaker as the French elections approach. A bank is expected to raise rates again in February or March — just as the campaigning nears its climax.

"France's economy is suffering from decades of neglect and introverted business policies and tax laws," said Steen Jakobsen, chief investment officer with Denmark's Saxo Bank.

"The election is only months away, so I'm expecting increased focus on the strong euro versus the dollar as an excuse."

[HenryTo]

With Slovenia now adopting the Euro, it just got infinitely harder for the ECB to make a uniform monetary policy for the region:

Euro-Wary Slovenians Already Miss Their Tolar

http://www.nytimes.com/2007/01/03/business/worldbusiness/03euro.html

[HenryTo]

Jim Rogers has also said in the past that the Euro is not a currency that will work out in the long-run - but that in the meantime, it represented an okay diversification for the dollar.
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Euro Threatened with 2007 Meltdown, as French Economy Slumps
Peter C. Glover 01 Jan 2007
World Politics Watch Exclusive

The resurgent strength of the euro in the international currency market could, ironically, be the agent of its demise in 2007. Problems caused by the lack of fiscal maneuverability that the "one-currency-fits-all" approach imposes saw Italy considering a return to the lira just last year. But in October, when French car manufacturing output dropped to 14 percent for the year, with the country's monthly trade deficit running at a staggering $2.7 billion, and economic growth shuddering to a standstill, it left one of the EU's biggest guns warning of possible withdrawal -- a move which would signal the end for European monetary union.

French Trade Minister Christine Lagarde has recently criticized the German-based European Central Bank (ECB), which, by raising interest rates six times in a year to 3.5 percent, has been instrumental in pushing up the value of the euro. During 2006, the euro rose 11 percent against the U.S. dollar and most Asian currencies, and a staggering 20 percent against the yen. Complaining about only selling one Airbus, and no satellites or ships at all, during the year, Lagarde pointedly told the ECB it needed to stop worrying about inflation and start "thinking about growth." French Premier Dominique de Villepin even called for limits on the power of the ECB, espousing the need to reassert national control over the economy. "We must clarify matters in exchange rate policy, which means taking back our sovereignty," he said. A clause in the EU's Maastricht Treaty (111-4) could allow them to do exactly that. The "get-out" clause allows EU states to set their own interest rates, effectively stripping the ECB of independent control.

The strength of French national ill-feeling over the ECB's handling of the euro was summed up by socialist candidate Ségolène Royal, who accused ECB President Jean-Claude Trichot of usurping democratic authority. "It's not for Mr. Trichot to dictate the future of our economies: it's a matter for our leaders chosen by the people. We must completely change the charter of the central bank," she said.

Paradoxically, it was the strait-jacket fiscal approach of the ECB-controlled single currency, and concern over its impact on national sovereignty, that persuaded Britain and Sweden not to join the euroland group of EU member nations. It is hard to deny, however, that such fears have been realized. Italy has lost 40 percent in competitiveness against Germany since the exchange rates were fixed ten years ago. France has lost over 20 percent, and Germany has emerged as the big winner with burgeoning exports to China, Eastern Europe and the Middle East.

Derek Scott, Tony Blair's former economic adviser, clearly believes the British view has been vindicated. Describing the euro system as " unworkable" he said, "The ECB faces an impossible task because there is no such thing as euroland: there are groups of countries going different ways." He noted that while "Germany had clawed back competitiveness by squeezing its economy . . . Italy, France, Spain and others have been enjoying property booms. Boom goes bust," he said. "In the end, the ECB may have to respond to the needs of the weakest economies, or monetary union will fall apart."

The Bruges Group, a neoliberal think-tank, has warned against European federation and monetary union, especially for Britain. The group has long refuted the EU's consistent claims that the euro has the ability to "deliver stability." The euro was launched at the exchange rate of $1.17. It quickly dropped to 80 cents. As I write it is now worth over $1.30. Stability in relation to its main competitor, the U.S. dollar, has in fact proven as elusive as the economic stability that was predicted for euro-zone member nations.

The British pound has, on the other hand, remained remarkably stable against the U.S. dollar. British Member of European Parliament and Bruges Group member Roger Helmer has maintained that "a single interest rate for euroland economies will mean a wrong rate for most countries, most of the time." Helmer adds, "That means inflation when rates are too low, and recession and unemployment when they're too high. In plain words, boom 'n' bust." A fair description of exactly what is happening to the economies of the EU's Mediterranean-rim member states. In the event, Britain did not come close to joining, preferring to heed Milton Freidman's prophetic warning to a Financial Times journalist in June 2003 that, "I think within the next 10 to 15 years the eurozone will split apart. The British government, on balance, should stay out of it." However, even Freidman's canny vision may, given current national economic pressures across Europe, prove overly conservative. In Germany, home of the ECB, there are loud rumblings suggesting euro confidence has evaporated. Bert Ruerup, former head of ex-Chancellor Gerhard Schroeder's Council of Economic Advisers, has admitted that the predicted gains from the euro amount to "dreams that have never come true." In June 2005, the leading German magazine Stern revealed that 56 percent of Germans wanted a return to the Deutschmark.

Whatever 2007 holds in store for the euro, it seems that euroland economic ministers already sense the 'iceberg' just over the horizon, however buoyant the 'titanic' euro currency may appear to outsiders. When the draft EU Constitution was rejected the writing was already on the wall. As Jean-Claude Juncker, the prime minister of Luxembourg who chairs the group of finance ministers from euro countries, admitted at the time: "As a result of the referendums, the euro is weakened." With major member states now seriously considering abandoning ship, and with no early recovery of the French and southern European economies looking imminent, the prospects for European monetary union -- and for the EU project itself -- look bleak. And if the euro-zone ship were to go down sometime in the new year, the resultant financial tsunami may well reach shores far beyond euro-currency states.

The euro was created in 1999 as "heir apparent" to the U.S. dollar's world reserve currency status. While in its first decade it has remained a shaky currency, its recent rise -- courtesy of the ECB's regular interest rate hikes -- has encouraged many of the world's central banks to diversify away from the U.S. dollar. Consequently, many countries now hold vast reserves of euros. If the euro were to collapse it could well precipitate a global financial crisis in an already precariously balanced system of international currencies.

Peter C Glover is a former British government spokesman who writes on international politics, the media and cultural affairs.