Category Archives: Euro

Italy Given Two Years To Correct Deficit

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As indicated earlier in the week, the EU Commission has given Italy two years to correct its deficit.

“The European Union on Wednesday gave Italy until the end of 2007 to cut its budget deficit in line with euro-zone rules. The EU head office said Italy has been violating the budget rules underpinning the common currency by running deficits above 3 percent of its gross domestic product in 2003 and 2004 and is set to do so this year and next. But due to weakness in the euro-zone’s third-largest economy, the head office said it will give the country two years instead of just one to bring the deficit back in line.”

Hands Off The ECB

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Deep seated as my criticisms are of the dithering and lack of imagination and vision over at the ECB, the situation would not be improved by giving national governments more say. I have only one response then to M de Vil-lepin: hands off.

“Mr de Villepin suggests the 12 finance ministers of the eurozone should open a ?dialogue? with the European Central Bank about how to deal with low growth and high unemployment by defining a common economic government. Although he stresses the eurogroup must respect the ECB’s independence, his remarks are bound to be seen as a further sign of European politicians’ desire to have a greater say over monetary policy.“

S&P Downgrade Portugal Debt

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The credit rating agency Standard and Poors yesterday cut Portugal’s long-term sovereign debt rating from AA to AA-. The downgrade isn’t exactly earthshattering, but it is a sign of the times.

“The downgrade is the result of the reported sharp deterioration in public finances . . . and the depth of fiscal reform required to reverse the deterioration seen in recent years,” said Trevor Cullinan, an S&P credit analyst.

The Euro and Structural Reform

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New Economist has a useful post one the euro and the reform process. He picks up on the point that as much as interest rate cuts, what the eurozone needs are the Lisbon Reforms. He also points to the fact that having cheap money in the southern part of Europe may be impeding and not facilitating reform. What can I say, I agree:

Nonetheless, I hope the ECB eventually do cut rates. Even if the stimulus to growth proves to be modest, it can’t hurt (likewise a weaker Euro). But of course what’s really needed in Europe is structural reform of product and labour markets, greater competition and the extension of the single market to services.

This makes the findings of new research by OECD economists Romain Duval and Jorgen Elmeskov, delievered at a recent ECB conference, all the more disturbing. Their paper, The effects of EMU on structural reforms in labour and product markets (PDF), points to:

…the apparent slowdown in the reform process after the formal advent of the euro and by the limited ability of EMU countries ? with the exception of few small ones and of reforms to retirement schemes ? to carry out needed reforms in areas where political resistance is normally strong.

This is consistent with their finding that:

…the absence of monetary policy autonomy seems to be associated with lower structural reform activity in large, more closed economies.

…Obviously these simple findings should not be exaggerated. However, if additional testing suggests that they are robust it would point to a potentially problematic aspect of EMU. In particular, an effect of EMU in the direction of weakening the incentives for structural reform in the larger member countries would be a cause for concern.

Just A Fairy Story?

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Or a real possibility: the euro at 1:1 with the dollar? The FT today cites one trader who thinks it a definite possibility. Of course, they also often quote others who hold a contrary opinion. So why do I pick up on this one? Because even though I don’t have access to the technical and currency market info, it fits in with my general reading of the respective underlying ‘macro’, and the way things could well evolve. Certainly the euro has been resisting strongly the push under the $1.20, and continually recovers ground lost. What you can say is that there is a lot of ‘volatility’ out there.

Paul Chertkow, head of global currency research at Bank of Tokyo-Mitsubishi, said a fresh impetus was needed to re-test the downside of the euros recent range, at $1.2020.

However, Mr Chertkow believes there are around $1bn worth of options in place below the $1.20 level, which could cause the euro to slide precipitously if triggered. We would have real panic, he says.

In this eventuality Mr Chertkow sees scope for the euro to fall as far as $1.10, or potentially, even parity against the dollar, led by euro-selling by US companies. American corporates have insufficient hedging ratios to protect a move on the downside through $1.20, he said. This would cause American corporates to capitulate.

Italy Referendum Campaign Launched

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The Italian Northern League have, as promised, launched their ‘bring back the Lira’ referendum campaign. Whilst at this stage there is something vaguely comic in all this, remember it is a wild card which will be floating around if Italy’s economic crisis worsens.

The Italian Northern League party launched a campaign to revive the lira at an 85,000-strong rally of its supporters on Sunday (19 June) The party, which holds minister posts in Silvio Berlusoni’s government, called for a revival of the lira as a “parallel currency” to the euro, which would remain the currency of the state budget, tourism and foreign trade. Under Italian law, a referendum must be held if half a million signatures are collected.

French Franc Naustalgia

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Well I’ve been reading about the Germans, the Italians, now apparently it is the turn of the French to feel naustalgic:

“Three out of five French people miss their old currency, replaced by the euro in 2002, a survey for Valeurs Actuelles magazine showed on Wednesday. In February 2002 that figure was just 39 percent.

While the rising tide of nostalgia seemed to chime with French voters’ rejection last month of theEuropean Union constitution, a breakdown showed longing for the franc was widespread even among those who support the EU project.”

I like that bit, “longing was widespread even among those who support the EU project”. This highlights the fact that it is perfectly consistent to feel pro EU and yet not want the common currency. Out of the wardrobe everyone.

Update: The Financial Times this morning also mentions the emergence of Philippe de Villiers, the leader of the nationalist Movement for France, as the champion of a referendum in France on continued use of the euro. According to the FT de Villiers, who is a leading anti-constitution campaigner, said a debate about Europe’s single currency was already under way in Germany, the Netherlands and Italy but had not properly started in France. ?Everybody notes today that the adoption of the euro was a technical success but its economic, political, and human toll is incontestable,?. Now much of the recent ‘ referendum euro’ talk comes from those who would predictably say what they are saying. They are normally not people with any special knowledge of the economics behind it, and I think no great significance should be attached, except the fact that these kind of comments are becoming commonplace, where they weren’t before. My guess is that debate about the euro will increase with time.

To Whom It May Concern

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The euro is now currently (11.38 CET) at $1.2045.

Update: Ah, now I’ve found the reason for todays move:

The euro fell to a nine-month low against the dollar after European Central Bank Chief Economist Otmar Issing spurred speculation the bank may reduce interest rates for the first time since 2003.

Asked in an interview with Germany’s Der Spiegel magazine whether investors’ expectations of a rate cut in coming months are justified, Issing said: “In the past, financial markets almost always anticipated ECB policy decisions correctly.”

“He is preparing investors for a rate cut and the market is responding to that by selling euros and buying dollars,” said Neil Jones, a director of foreign-exchange sales at BNP Paribas SA in London.

I hasten to add that I consider Otmar Issing to be perfectly authorised to steer the euro down in this way. This is a much more considered move than Jean-Claude Junker’s recent outburst. Basically I agree with it, I am just waiting to see whether Greenspan will in fact be able to continue raising US rates. If he does it once, I can’t see him continuing for long.

The Forint Is Not The Swiss Frank

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Interesting to note, following our discussion of the state of play of the Hungarian economy, that Hungary’s finance minister is not a euro pessimist. Janos Veres said in an interview with the Financial Times that he did not foresee a wider crisis for the single currency and that Hungary had ‘no option’ but to continue aiming to join the eurozone in 2010:

“I do not think Hungary has any other playing field,” said Mr Veres. “The Hungarian forint is not the Swiss franc. It cannot be maintained independently for decades.”

But Mr Veres, whose left-liberal government faces elections next spring, rejected calls for deep spending cuts that many economists view as necessary to keep Hungary on track for joining the single currency.

Instead, he outlined a plan for moderate spending cuts and the introduction of a simplified tax system designed to increase revenues next year. “We will not do anything that represents a radical, structural change,” he said.

Obviously the attraction is those nice low interest rates, to help pay for all that extra debt. But seriously, with the economically healthier Czech Republic now questioning whether it will join the euro, isn’t there a danger of the eurozone becoming a club for those structurally incapable of walking alone. “Oh when you walk, through the storm, hold your head up high,……….”

Lithuania To Take Decision on Euro Referendum

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The Lituanian parliament is to debate a motion which proposes holding a referendum on euro membership. Lithuania is scheduled to join the euro in 2007. The Prague Daily Monitor also has an article which draws attention to the growing ‘euro’ scepticism in the Czech republic.

“The Lithuanian parliament will vote on whether or not to hold a referendum on the introduction of the single currency to the country, according to news agency AFP.

The Lithuanian opposition Liberal Democrat party has gathered the necessary 36 signatures required for the parliament to vote on the matter. It has now to do so within a month, as under Lithuanian law, lawmakers have to vote within one month after a proposal is introduced, says the press agency. After the EU Constitution was rejected by France and the Netherlands, the euro has found itself at the centre of debates.”