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Europe's Looming Bust Replies |
HenryTo
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 Posted: Sat Apr 19, 2008 11:04 am Post subject: |
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In light of all this, the ECB is still talking about hiking rates - simply amazing. The ECB is using monetary policy to target "second-round effects" in union wage increases, etc, when what the Euro Zone needs is a (much) more flexible labor market.
Given that the unions generally have not had any wage increases over the last five years, however, this is not surprising. Moreover, this has come in light of rising productivity and rising profits in the Euro Zone economy, so I think they would let this one slide. On a forward-looking basis, I doubt the latest wage demands will extend into 2009, given the slowing global economy and the high Euro - so I think the ECB will "come around" and start cutting sometime in the second half of this year. |
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rffrydr
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rffrydr
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HenryTo
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| Posted: Wed Feb 13, 2008 1:56 pm Post subject: |
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| The deteriorating conditions in the Euro Zone and Japan have been captured by both the OECD and the ECRI leading indicators weeks prior. In other words, the US has not been leading the global economy downwards a la the "recoupling scenario." There was also no decoupling to speak of outside of EMs. Europe and Japan have been slowing down at the same time that the U.S. had. |
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rffrydr
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| Posted: Wed Feb 13, 2008 11:54 am Post subject: |
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Cisco offers a warning NOT from a bank (TRS):
http://ca.reuters.com/article/businessNews/idCAL0880611920080210
| Quote: | Significantly, the Cisco numbers suggested conditions were deteriorating faster in Europe than the United States. In the quarter through January order growth in Europe more than halved to 8 percent. U.S. order growth slipped only one percentage point to 12 percent.
"It's the most cautious I've seen CEOs in the U.S. and Europe in many years," Cisco Chief Executive John Chambers said. |
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rffrydr
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rffrydr
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| Posted: Wed Feb 06, 2008 6:46 pm Post subject: |
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The "Euro" is a "Union":
| Quote: | LEX COLUMN: Fried unions
Financial Times
Published: Dec 28, 2007
Some last longer than others but most currency unions end in collapse.
In the mid-1700s, Massachusetts, faced with devaluation and inflation, broke from a monetary union of four New England colonies. A century later, the French-led Latin Monetary Union, which included Belgium and Italy, struggled along before being subsumed into the gold standard. The East Africa Currency Area blew up at the same time as sterling in 1977. Germany's Customs Union and the monetary union of the US were rare successes.
So history suggests that the euro's chances of survival are not terribly high. The question, therefore, is when it might implode. That is hard to say but, at the margin, the currency's appreciation during the past few years is not helpful. That is because, for the first time since the euro's birth in 1999, the strong currency appears to be having a negative effect on growth in the core eurozone countries of France and Germany.
The main trouble is that the European Central Bank's benchmark interest rate of 4 per cent is probably too low, given the overall inflationary environment - and definitely too low for the eurozone's "periphery" countries. Ireland and Spain already have huge asset price bubbles due to their inability to set appropriate monetary policy.
The economies of some Baltic states, and others such as Bulgaria with currencies pegged to the euro, are overheating. Whether the pegs hold until these countries are welcomed into the eurozone is now open to question. Failure here could shift attention to imbalances elsewhere in the union.
Potentially slower growth across the eurozone would also hit tax receipts, putting already strained budgets under further pressure. In Italy, for example, burdensome government debt and a widening fiscal deficit leave no room at all for manoeuvre. If fiscal discipline begins to lapse, that is when the real trouble could start. So far, the euro is seen as a triumph, but all currency unions are tested from time to time. Further appreciation could well herald one of those periods. |
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rffrydr
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| Posted: Mon Jan 07, 2008 11:07 am Post subject: |
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What's wrong with this (current) picture?
| Quote: | Europe's challenge
Published: January 2 2008 02:00 | Last updated: January 2 2008 02:00
Can continental Europe buck the trend? Problems in the US and UK banking and housing sectors seem to have wreaked less havoc in the eurozone. Business conditions remain reasonably robust and exports have held up well in spite of the appreciating currency. The manufacturing export orders index, though, is falling and is below its long-run average. Even if exports to the US slow, they account for only 2.4 per cent of eurozone gross domestic product. As Morgan Stanley points out, assuming US imports fell twice as fast as US GDP, a one-point reduction in US growth would cut eurozone growth by just 0.05 per cent.
Europe's economy, however, will suffer more from continuing tightness in the money markets. The European Central Bank has managed to narrow the spread between its refinancing rate and the rate at which banks lend to each other. Outstanding loans to the private sector are still growing fast - at more than 11 per cent year on year in October - but this may signify increased recourse to bank lending as the commercial paper market dried up. In addition, according to the ECB's bank lending survey, banks appear to have switched their efforts from increasing the volume of their loan books to increasing its quality. Consumer spending in the eurozone has not been as fuelled by borrowing as in the US and UK and it is the corporate sector that is the more (relatively) indebted. Thus higher borrowing costs will first be felt in slowing investment rather than consumption.
Meanwhile, wages and employment are growing at their fastest since 2001 and food and fuel prices help keep inflation persistently above target. With policy rates neutral rather than restrictive, the ECB is much more likely to choose the Charybdis of somewhat lower growth than the Scylla of higher inflation.
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I count three things. All of which imply lower euro.
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rffrydr
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HenryTo
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| Posted: Mon Dec 17, 2007 1:28 pm Post subject: |
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If the Germans think of the Euro that way, then you can bet that the French and the Italians are even more against the Euro.
Also, many upper-middle class Chinese are now trying to get citizenship into the Czech Republic - in anticipation of its inevitable acceptance into the Euro Zone.
From a political, practical, and emotional standpoint, the disintegration of the Euro as a currency is inevitable. If folks are already having so many problems with the Euro during a boom, then God knows what will happen if Italy and France sinks into a major recession and the ECB refuses to lower rates. |
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rffrydr
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rffrydr
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rffrydr
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rffrydr
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| Posted: Tue May 01, 2007 7:28 am Post subject: |
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Eastern Europe has proven the surprise:
Good times in the euro area, and getting better still
VIEWED one way, these should be nervous days for the euro area. Its exporters are having to cope with a rising currency, which has been nearing a record high against the dollar (and has notched one against the yen), and a slowing American economy. On the home front, Spain's long property boom may be coming to a dusty end. The currency club's fourth-largest economy has accounted for nearly two-fifths of its net job creation since 1999, as well as a disproportionate share of its GDP growth.
However, viewing things another way makes more sense. Pleasant surprises continue to emanate from the euro area--notably from Germany, its biggest economy. This week Ifo, a Munich research institute, unveiled another strong reading for its monthly business-sentiment index. The country's five main economics institutes, including Ifo, have raised their forecast of GDP growth this year to 2.4%; last autumn they expected a percentage point less. French presidential candidates apart, the zone's politicians have been unusually accepting both of the currency's rise and of one of its causes: the European Central Bank's clear intention to raise interest rates further. The ECB is likely to take another step, from 3.75% to 4%, in June.
A faltering America and a falling dollar will, other things equal, hold euro-area exports back. But the greenback is not the only currency that counts. Though the euro has climbed by 5% against the dollar since early February, it has risen by much less against the pound and has fallen against currencies such as the Czech koruna and Hungarian forint. That has held the rise in its nominal trade-weighted rate against 24 currencies, calculated by the ECB, to 2.7%. This rate is still a bit weaker than in late 2004, when the zone's economy was in far worse shape (see chart).
Moreover, the pattern of exports has been shifting. The zone's fastest-growing markets are to the east. Julian Callow, of Barclays Capital, estimates that exports to the European Union's new and would-be members (including Turkey) and Russia went up at an annual rate of 20% in the second half of last year. They are now 19% of the total, up from 13% in 1999. Exports to Asia have also been growing fast.
Much of this demand from eastern Europe and Asia has been of particular benefit to Germany, a big supplier of capital goods. However, Germany's success is based on more than being in the right industries at the right time. Its bosses and unions have held wage increases below inflation for several years. That discipline may help German businesses to withstand the euro's rise better than others in the zone. Arguably, Germans have had not years but decades of practice. Before the euro was born, the D-mark was revalued more than once while French and Italian companies were featherbedded by devaluations of the franc and lira.
Possibly, this year's German wage round will undo some of this hard-won competitiveness. On April 26th the country's biggest union, IG Metall, said that it would call token strikes in North Rhine-Westphalia, the most populous state, from April 30th, after talks with employers broke down. Nevertheless, workers are unlikely to get anything like the 6.5% the union wants.
Anyway, a little extra in German pay-packets may do more good than harm, by giving domestic spending a boost. Although domestic demand across the euro zone has already taken over from exports as the main motor of growth, companies rather than consumers have provided the fuel. German consumers have been especially reluctant to spend.
This may be about to change. Not only might wage growth pick up, but unemployment has dropped by well over half a million in the past year or so. Fear of joblessness has faded. Both consumers and retailers seem more confident, and now January's increase in value-added tax is behind them. If Spain is about to struggle, a continuing German revival will be all the more welcome.
Source Citation: "Strength to strength; The euro zone's economies." The Economist (US) 383.8526 (April 28, 2007):
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HenryTo
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