Post by jeffolie on Nov 19, 2013 9:30:58 GMT -6
Nov. 18, 2013
Why the euro zone won’t be any calmer in 2014
Commentary: Political paralysis, economic stagnation hinder progress
By David Marsh, MarketWatch
After all the efforts to build up euro-area confidence during the last three years, as well as painful and effective policy corrections in the deficit countries, politicians, investors and voters might have expected to enter calmer waters next year.
In fact, the worst is not over.
The next 12 months will be the euro bloc’s year of maturity. Unfortunately, for reasons that are beyond anyone’s influence, a lot of things are happening at the wrong time.
German Chancellor Angela Merkel faces a tight deadline in her negotiations with the opposition Social Democrats.
The first big problem is politics. The European Parliament elections next May look likely to be a disaster for pro-euro EURUSD +0.25% parties. Europe’s stalwarts have been claiming for years that the Strasbourg-based assembly is the true repository of European decision-making. Its ability to shape, make and block legislation has expanded commensurately.
Those who have given the Parliament so many extra powers may now regret their enthusiasm. Popular discontent about sluggish growth and high unemployment, as well as apathy-driven low turnout, is likely to strengthen substantially the scores of anti-European parties. Representatives of groupings like the French National Front, the Dutch Party for Freedom (PVV) or British Independence Party (UKIP) may make up 25% or more of the future Parliament.
At a time when Strasbourg has important influence on key pieces of European law on trade and commerce, or on the future banking union, the swing to the skeptics will dent efforts to reform Europe. Already-existing belligerence between creditor and debtor countries will be compounded by psychologically destabilizing skirmishing across the political spectrum.
Policy paralysis in Germany, where attempts at coalition-building between the Christian Democrats (CDU) and Social Democrats (SPD) have hit numerous hurdles, reinforce the impression of political drift. Whatever the buoyancy caused by multi-layered cheap money expectations, all this cannot fail to unsettle financial markets.
What’s Happening to Europe’s Growth Engine? The latest euro-zone manufacturing data from Europe will be the market’s focus next week along with new clues to the thinking at the Fed and Bank of England.
The timetable for Germany’s two big parties to set aside arguments and hammer out an accord is a tight one. Negotiations on forming a Grand Coalition have been bedeviled by differences on many individual items, ranging from taxation and spending through to legalization of gay marriages. The CDU and SPD need to agree on strategy and on key ministerial appointments by Nov. 28. This would allow a fortnight for the SPD to put the agreement to a referendum by party members, with the result to be announced on Dec.15.
Two days later, on Dec.17, Angela Merkel is due to be re-elected as chancellor by the Bundestag. On Dec. 19 she travels to Brussels for a crucial European summit that should put the finishing touches on the banking union plans ahead of next year’s dissolution of the European Commission and election of a new Parliament.
There’s plenty of room for the SPD — wounded by its poor German parliamentary election score on Sep. 22 and sensing that it cannot really lose in the coalition talks with Merkel — to attempt to blackmail her on key issues dear to Social Democratic hearts. There is still an outside chance that the SPD could stage an anti-Merkel coup and achieve a majority in the Bundestag by teaming with the Greens and the far-left Linke party. Or, after a real deadlock, we may see new elections in Germany next year.
If Merkel goes to Brussels weakened by bruising Berlin encounters, or, worse, without a coalition agreement, then Europe’s plans for 2014 as a year of renewal will look even less likely to succeed.
All these issues are made still more difficult by renewed weakness in European growth in the third quarter. Worse-than-expected figures for Germany, France and Italy dragged down euro-area expansion to just 0.1% from 0.3% in the April-June quarter. This validates the European Central Bank’s interest rate cut the previous week, aimed at forestalling the risk of deflation that some ECB council members plainly take more seriously than others.
The ECB’s review of European banks’ books over the next 12 months takes on new significance. The ECB’s investigations and the rigorous stress tests being mapped out are a necessary means of rebuilding confidence in European banking. The plan was to carry them through at a time of accelerating recovery.
Instead, we’re still in an unstable period of the economic cycle, with acute risks of setback.
On the regulatory side, the ECB is understandably bringing the banks to heel, with restrictive impact on credit, as numerous indicators demonstrate. A report by rating agency Fitch shows that, in anticipation of stricter capital rules, the largest European banks increased their exposure to sovereign debt 26% in 2011 and 2012, while cutting corporate lending by 9%.
On the monetary side, however, in order to counter much-trumpeted deflationary impulses especially in the peripheral countries, the ECB is lowering interest rates in a way that the representatives of the creditor countries on the ECB council find difficult to accept. Because these complications could cause a negative feedback loop into the stress-test results, there is a clear threat of a vicious circle.
The net effect of these developments will damp forces for recovery in Europe.
And we have to consider the mood outside Europe too. Divisions between Europe and America have occupied the headlines. There’s no indication things will get better.
The furor over U.S. intelligence activities, America’s lack of interest in the overseas impact of its budget dispute, the massive rival attractions of China and Asia, looming American energy independence, criticism of German current-account surpluses — all this points to trans-Atlantic discord. Europe needs friends and understanding on the international scene.
Instead we see growing alienation, mutual irritation and a dull sense that, if Europe’s crisis bubbles again to the surface next year, the Europeans will be sitting alone with their troubles.
David Marsh is chairman of London and Oxford Capital Markets.
www.marketwatch.com/story/why-the-euro-zone-wont-be-any-calmer-in-2014-2013-11-18?link=kiosk
Why the euro zone won’t be any calmer in 2014
Commentary: Political paralysis, economic stagnation hinder progress
By David Marsh, MarketWatch
After all the efforts to build up euro-area confidence during the last three years, as well as painful and effective policy corrections in the deficit countries, politicians, investors and voters might have expected to enter calmer waters next year.
In fact, the worst is not over.
The next 12 months will be the euro bloc’s year of maturity. Unfortunately, for reasons that are beyond anyone’s influence, a lot of things are happening at the wrong time.
German Chancellor Angela Merkel faces a tight deadline in her negotiations with the opposition Social Democrats.
The first big problem is politics. The European Parliament elections next May look likely to be a disaster for pro-euro EURUSD +0.25% parties. Europe’s stalwarts have been claiming for years that the Strasbourg-based assembly is the true repository of European decision-making. Its ability to shape, make and block legislation has expanded commensurately.
Those who have given the Parliament so many extra powers may now regret their enthusiasm. Popular discontent about sluggish growth and high unemployment, as well as apathy-driven low turnout, is likely to strengthen substantially the scores of anti-European parties. Representatives of groupings like the French National Front, the Dutch Party for Freedom (PVV) or British Independence Party (UKIP) may make up 25% or more of the future Parliament.
At a time when Strasbourg has important influence on key pieces of European law on trade and commerce, or on the future banking union, the swing to the skeptics will dent efforts to reform Europe. Already-existing belligerence between creditor and debtor countries will be compounded by psychologically destabilizing skirmishing across the political spectrum.
Policy paralysis in Germany, where attempts at coalition-building between the Christian Democrats (CDU) and Social Democrats (SPD) have hit numerous hurdles, reinforce the impression of political drift. Whatever the buoyancy caused by multi-layered cheap money expectations, all this cannot fail to unsettle financial markets.
What’s Happening to Europe’s Growth Engine? The latest euro-zone manufacturing data from Europe will be the market’s focus next week along with new clues to the thinking at the Fed and Bank of England.
The timetable for Germany’s two big parties to set aside arguments and hammer out an accord is a tight one. Negotiations on forming a Grand Coalition have been bedeviled by differences on many individual items, ranging from taxation and spending through to legalization of gay marriages. The CDU and SPD need to agree on strategy and on key ministerial appointments by Nov. 28. This would allow a fortnight for the SPD to put the agreement to a referendum by party members, with the result to be announced on Dec.15.
Two days later, on Dec.17, Angela Merkel is due to be re-elected as chancellor by the Bundestag. On Dec. 19 she travels to Brussels for a crucial European summit that should put the finishing touches on the banking union plans ahead of next year’s dissolution of the European Commission and election of a new Parliament.
There’s plenty of room for the SPD — wounded by its poor German parliamentary election score on Sep. 22 and sensing that it cannot really lose in the coalition talks with Merkel — to attempt to blackmail her on key issues dear to Social Democratic hearts. There is still an outside chance that the SPD could stage an anti-Merkel coup and achieve a majority in the Bundestag by teaming with the Greens and the far-left Linke party. Or, after a real deadlock, we may see new elections in Germany next year.
If Merkel goes to Brussels weakened by bruising Berlin encounters, or, worse, without a coalition agreement, then Europe’s plans for 2014 as a year of renewal will look even less likely to succeed.
All these issues are made still more difficult by renewed weakness in European growth in the third quarter. Worse-than-expected figures for Germany, France and Italy dragged down euro-area expansion to just 0.1% from 0.3% in the April-June quarter. This validates the European Central Bank’s interest rate cut the previous week, aimed at forestalling the risk of deflation that some ECB council members plainly take more seriously than others.
The ECB’s review of European banks’ books over the next 12 months takes on new significance. The ECB’s investigations and the rigorous stress tests being mapped out are a necessary means of rebuilding confidence in European banking. The plan was to carry them through at a time of accelerating recovery.
Instead, we’re still in an unstable period of the economic cycle, with acute risks of setback.
On the regulatory side, the ECB is understandably bringing the banks to heel, with restrictive impact on credit, as numerous indicators demonstrate. A report by rating agency Fitch shows that, in anticipation of stricter capital rules, the largest European banks increased their exposure to sovereign debt 26% in 2011 and 2012, while cutting corporate lending by 9%.
On the monetary side, however, in order to counter much-trumpeted deflationary impulses especially in the peripheral countries, the ECB is lowering interest rates in a way that the representatives of the creditor countries on the ECB council find difficult to accept. Because these complications could cause a negative feedback loop into the stress-test results, there is a clear threat of a vicious circle.
The net effect of these developments will damp forces for recovery in Europe.
And we have to consider the mood outside Europe too. Divisions between Europe and America have occupied the headlines. There’s no indication things will get better.
The furor over U.S. intelligence activities, America’s lack of interest in the overseas impact of its budget dispute, the massive rival attractions of China and Asia, looming American energy independence, criticism of German current-account surpluses — all this points to trans-Atlantic discord. Europe needs friends and understanding on the international scene.
Instead we see growing alienation, mutual irritation and a dull sense that, if Europe’s crisis bubbles again to the surface next year, the Europeans will be sitting alone with their troubles.
David Marsh is chairman of London and Oxford Capital Markets.
www.marketwatch.com/story/why-the-euro-zone-wont-be-any-calmer-in-2014-2013-11-18?link=kiosk