Eurozone economics

[Logan]

I have long considered that the eurozone and in particular the Euro is living on borrowed time. It seems the chickens are now starting to roost. So those of us with a Sterling income may have some cause for optimisim.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/30/ccambrose130.xml

[Ron Avery]

Euro on borrowed time[:D][:D], you really are up there with the cockoos Logan, The Euro is the single currency for over 320 million Europeans against 60 million who use the £.

When Joe public in the UK stops reading foreign owned papers like The Sun and realises that he is being ripped off everytime he sets foot in Europe by greedy UK banks and and financiers and that he would be much better off with a common currency iike the €uro,  the £ will be a dead duck.

As for that article, its statistical nonsense, look at it.  Did they reprint that article in  2003, 2004 and every other time investment dipped and forgot to publish another article that showed the re-investment that has obviously occured, each dip is matched by a higher climb.

Of course finance is coming out of the euro, it has been too strong for too long, the big money traders will now move to another currency probably the US$ obstensibly to get the price of oil down, but really to line their pockets.

[Gluestick]

Ron:

It is obvious, with respect, that by your posting, you have demonstrated pretty convincingly your knowledge of global currency markets.

It matters not a fig how many people use the Euro: what matters is whether the mechanism can be maintained, with serious and significant credibility in the World's Forex markets.

Those bears of the Euro amongst us, such as Logan and myself, have commented oft before, how fraught with internal friction the system was: and how, as it's value zoomed (on the back of weakened other major tradable currencies such as the US$ and the £ sterling), this rapid exchange value increase was placing great strains on Eurozone manufacturing exporters.

Now, I have been involved in tracking, analysing, writing about and using the various precursers (Snake, Super Snake, et al) which led, eventually, to the partial realisation of the insane ideologists of Brussells passionate dream: EMU; (Economic and Monetary Union).

EMU was part of the grand plan right back when the Coal and Steel agreements led to the Treaty of Rome in 1957: a current vision of these faceless power mad idiots, is tax harmonisation along with harmonisation of civil and criminal law.

Nice dream!

One simply cannot take a disparate bunch of states, with their economies at various levels of development and meld them into one harmonious whole: whilst it's a crazy concept to include places like Portugal, Spain and Greece it becomes sheer fantasy to attempt the same with recently ex-collective economy states still mainly run by the Communist leaders and Mafiya of yesterday.

Shortly, the ECB has a clear and simple choice: either sell vast volumes of Euros on the global Forex markets or drop Euro interest rates dramatically: if not, then huge swathes of manufacturing exporting industry will be on their knees and like Airbus Industrie, transferring increasing amounts of their wealth producing effort elsewhere. Which, of course, will cause large levels of yet further unemployment and worsen the incipient recession.

As I wrote at the time in a leading US business mag, if one had 12 Switzerlands, then the concept of the Euro would work: however, if one had 12 Switzerlands, then one wouldn't need it!

Already, the core of the EU is showing serious signs of strain: Germany and France, with perhaps Holland and Beneluxe, may well break away and form their own separate form of union.

Germany, still being the most successful and wealthy state is rapidly becoming rather tired of being expected to carry the lame dog economies, like Italy: even Italy is enjoying increasing hostility from successful Northern manufacturers and banks, being expected to carry the South. And there are increasing rumours of an economic partition, along the lines of the League of Lombardy.

One final comments: thanks to the gutter press you mention, Ron; the world and his wife think that all currency peaks and troughs are due to the invisible enemy, speculators. Speculation and investment in currencies is a side affect of the major activity: people trading interstate and inter-country and needing to exchange into their own base value. (Include investment in capital assets, such as companies, "Trading").

 

 

[Logan]

[quote user="Gluestick"]

One simply cannot take a disparate bunch of states, with their economies at various levels of development and meld them into one harmonious whole: whilst it's a crazy concept to include places like Portugal, Spain and Greece it's becomes sheer fantasy to attempt the same with recently ex-collective economy states still mainly run by the Communist leaders and Mafiya of yesterday.[/quote]

Thank you for that post Gluey, very well put and cut to the quick. I also thought that the Telegraph article illustrated the current problems of the 'PIGS' countries very well.

I have some business interests in Spain so I'm particulary concern what's happening there at the moment. It is currently dire. These concequences have been well documented before and there is no pleasure to see the fruits of fear materialise. Of course the Spanish economy is not just in trouble because of the Euro. However if they had control and power over their interest rates and macro economic management at least they could stand or fall on their own elected singular petard. With the power do actually do something to prevent the economy falling off a cliff.

I have said before that I think the Euro will be made to work because it was a political project not an economic one. That concept is in my view flawed and making (forcing) it to work will hurt us all. However the pain would have to be severe indeed if the idea were to be abandoned or even watered down. The current politico's sitting in Brussels have no intention of rocking the EU boat, at least not for the time being. Why? I would suggest that it's in their personal interests not to. Sarkozy and Belesconi do have some common ground in opposition and France soon will have the EU Presidency which may produce some political ripples. 

However I think in the medium term the state of the world economy will prove more of a distraction. The price of oil, value of the Dollar and the lack of global investment is a triple wammy. Concerns with Euro realities will be put on the back burner and politicans will blame everything except the truth. The ECB and federalist politicans all have vested interests in talking up the current policies of EU monatory union and the Schengen accords. Trouble is they just don't work and it brings negative concequences.

We Europeans all then have to pay a price and have little power in reality to influence anything. Despite the loud claims to democratic accountability. I take some comfort from history. All powerful monoliths eventually fall. Trouble is the mess they leave behind.

[Gluestick]

Excellent post, Logan and hits all the high spots

Having considerable sympatico for Espana for a number of reasons, I once had high hopes that the post-Franco liberalisation of the country and the increasing level of inwards investment and booming nature of the Madrid bourse, plus their inate and perhaps almost hidden industries would catapault them into quite reasonable economic stability, I became disillusioned by the various false trails the politicians were leading them along, with the current worrying outcomes.

Great shame.

I am deeply cynical over the EU and have, sadly, reduced it to the core realisation that as is invariably the case, the politicians can only myopically visualise from their own selfish perspective that a rapidly expanding Euroland provides an equally rapidly expanding power base and thus objective for punitive and wholly unecessary taxation.

They seem to have forgotten the lesson of the Golden Goose and the eggs.........................

[quote] However if they had control and power over their interest rates and macro economic management ................[/quote]

As the Bard might have said, "Aye, there lies the rub!"

This is my main objection to the whole concept of EMU: one size fits all is not a cogent plan or strategy for financial and fiscal management of a group of largely disparate economic bases: rather, it is a plan, of sorts, for fiscal and financial chaos.

'Twas ever thus.............

 

[chessfou]

I'm more pessimistic about the prospects for the UK (and the US).

The DT article makes a big point of the Eurozone FDI being negative to the tune of about $220bn over the past year.

However, take a look at the UNCTAD figures (only up to 2006) here (US$bn):

http://www.unctad.org/Templates/Page.asp?intItemID=3198&lang=1

                                               UK        France      USA

average p.a. 1990-2000          -33         -25         +17

average p.a. 2003-2004          -40         -17         -149

average p.a. 2005-2006          +85         -36         +16

I would dearly love to see the figures for 2007 (and what do you suppose they'll be in 2008?). At what cost will the UK & US be seen to have achieved that upward "blip" in 2005-2006?

[Gluestick]

I well remember, Chessfou, when Lord Hanson's partner in crime, Gordie White, set off to the USA to open Hanson Trust's offshoot from an hotel room.

He was only funded microscopically and sucessfully leveraged his seed capital locally for each and every acquisition!

This dangerous strategy was mainly successful since at that time, the equities markets were in the middle of the beginning of what became a mad bull run.

James Goldsmith also, predicated his own shift to New York on similar strategies.

Thus both of these major M & A attacks mainly employed local money: however, they would have been counted as "Inwards Investment"!

When Norman Tebbitt was trumpeting about his success with bringing the Nissan facility to Durham - and allowing, simultaneously BL to be destroyed! - the reality was rather like an in iceberg. Not only was the Nissan plant a screwdriver facility, which allowed tariff-free access to the EU, the true capital flows were such that Nissan were always extracting capital and repatriating this back to Japan.

The majority of inwards investors do precisely the same.

I am thus rather cynical about firstly the essential need for inwards investment and its contribution to the target state economy!

However as with so much, it provides excellent sound bite opportunities for politicians....................

 

[Logan]

I would be interested Gluey in your opinion of Sovereign Wealth Funds. In recent months they seem to have been responsible for bailing out most of Wall Streets investment banks due to the subprime fiasco. That fact could of course account for the flight of capital from the eurozone. However I think it's more likely that they see the medium term prospects for the US are far brighter than Europes. Wiki has some interesting details:-http://en.wikipedia.org/wiki/Sovereign_wealth_fund 

Perhaps SWF's in the minds of institutionals hierarcy bring an ethical dimension to foreign investment which in turn causes governments to worry less. I am not so sure. Give me a buccaneering venture capitalist anyday. His motives are always just profit. Some of these SWF's are owned by some of the most undemocratic states on the planet. I wonder what it is they find so attractive about our failing corporate giants. It could not happen in France. There is a law which prevents most French companies being owned by other states or foreign individuals. How that got passed the European Commission is anyones guess.  

[Gluestick]

SWFs are for me, Logan, a most worrying development of the gradual erosion of any state's sovereign assets and the hidden downside is how a nation state with possibly cultural and economic ethos which is in diametric opposite to the target state, can exert huge future influence on the target state's society, economy and stability.

Back in the late 70s, I was pretty well immersed in dealing Petro-Dollars: indeed, I developed something of a rep in this sector.

At that time, as the OPEC price hikes impacted on the Western economies, the oil producing states such as Saudia, were literally awash with cash which urgently needed homes.

A simple quid pro quo developed, in particular between Saudia and the USA: the USA would suffer the huge - relative - price hikes, but the surplus cash would gravitate to the leading US banks and investments banks at very fine rates (compared to LIBOR, e.g.) and be "wholesaled" down through the markets. Meanwhile, the producers would ramp up their spend on military hardware, training, consulting services and civil engineering projects as well as hard imports.

The UK, however, has never been very successful in this direction, apart from BAE Systems and some minor civil engineering works, most of them in the Gulf States and UAE. The friction and divorce of KIT (Kuwait Investment Trust - the investment fund of the Al Sabahs in Kuwait) from the City of London represents a good example.

After Big Bang and the abolition of the 1948 Exchange Act (early Thatcher), little if any true reciprocity has existed between external states and the UK. As an example, when British Gas was privatised, Japanese investors bought for term investment, but also heavily stagged the issue; private UK investors were only allocated a dribble. This trend carried on with all major privatisations. However, when NTT (Nippon Telegraph and Telephone) was privatised, foreign investors were, sensibly IMHO, banned from acquiring the shares.

The UK has rolled over and invited any foreign wheeler dealer, hedge fund, private equity fund, VC whatever to jump in and rape the economy, to our whole detriment.

Perhaps the recent acquisitions of water utilities by the hostile Australian bank MacQuarie, sets the current trend. After numerous water companies had been passed from pillar to post, with each seller and buyer extracting millions - and the consumer suffering poor service, no fullfillment of Thatcher's promise and primary raison d'etre for the privatisation, namely urgent huge capital spend on infrastructure and plant as well as new reservoir capacity and above all outrageous prices -  McQuarie's latest wheeze is to mount an hostile takeover, take the company off 'change; then borrow enough to repay the total costs, and leave the company struggling to debt service the new, local, loans and repay principal!

In the not too distant future, the UK's long suffering and much put upon consumers, will be almost totally in thrall to foreign rapacious capitalists, with little or no effective control over their actions and attitudes. The so-called "regulators" are a total joke and merely toothless lions, in place simply to act as a sop to the gullible public.

The USA, of course, is following evermore rapidly along the same primrose strewn path of junking its manufacturing base and over-relying on that, to me, oxymoronically described, Service Economy, to its detriment, as the next three or four years will demonstrate, loud and clear.

Allowing major, if flawed, banks to be beholden to a gang of dubious foreign investors is highly dangerous and will impact seriously, on US fiscal and financial strategies.

Exciting times................

 

[Graham & Brenda]

Taking a rather simplistic view, when the Euro was introduced I could not understand how such disparate economies with different levels of development, unemployment, consumption, growth etc., etc. could be managed with one interest rate policy. That problem seems to persist. However, now I can't see how it could be unwound at this stage - or even improved upon. I suppose we are stuck with it warts and all.

[Gluestick]

Not at all, Graham.

Unwinding from the Euro would be a fairly simple matter rather like the UK's decimalisation: on an agreed day, fixed value for say the New French Franc would take place and all account balances would be connverted at that rate.

The pain of staying in will soon be greater than the pain in retreating.

What is often forgotten is that each state's central bank has the right to issue "Authorised" notes and coinage. Earlier Euros in circulation did state which state issued them.

In theory, the separate central banks have to seek the agreement of the ECB, prior to issue: however, as Italy showed, it is fairly simple to fudge their economic indicators in order to qualify for membership at the beginning.

This preserved right does of course, tempt the poorly run problem economies like Italy to start up the coin stamping machines..........

Personally, I believe that eventually, as stated earlier, a group of core EU states will withdraw and they may well issue their own replacement such as the "New Euro".

When one considers the states waiting in the wings, it ought to be enough to give any sane financial analyst the heebie jeebies............

Remaining currencies on track to be migrated  v • d • e 

Currency	Abbr.	Rate	Conv goal
Slovak koruna	SKK	30.1260[18]	2009-01-01
Lithuanian litas	LTL	3.45280	2010-01-01
Estonian kroon	EEK	15.6466	2011-01-01
Bulgarian lev	BGN	1.95583[19]	2012-01-01
Polish złoty	PLN	—	2012-01-01
Latvian lats	LVL	0.702804	2012-01-01
Czech koruna	CZK	—	2012-01-01
Hungarian forint	HUF	—	2012-01-01
Romanian leu	RON	—	2014-01-01
Swedish krona	SEK	—

[Logan]

[quote user="Gluestick"]

SWFs are for me, Logan, a most worrying development of the gradual erosion of any state's sovereign assets and the hidden downside is how a nation state with possibly cultural and economic ethos which is in diametric opposite to the target state, can exert huge future influence on the target state's society, economy and stability.

[/quote]

My thoughts exactly. I appreciated very much your insight and have deleted your text for my quote here only to make things easier to read. However we part company on 'repatious capitalists.' The realities are in my opinion that investment is essential for growth. It has to come from somewhere. Better the devil you know....... Without growth you get economic stagnation. Here are some symptoms.http://www.ft.com/home/europe

I actually have to resist believing the worrying conspiracy theory about SWF's. That theory goes that 'rogue' oil rich states such as Iran & Libya are trying to do for the USA what Regan did for Soviet Communism. ie: Destroy it's economic base through excessive military spending. However now I don't think that will be necessary. If these SWF's own most of the US banks and most of the industrial military complex. Job done.

Thanks again for your imput Gluey.

[Gluestick]

Please remember, Logan, that essentially, I am a capitalist.

That said, I am confident that unfettered capitalism leads to the typical nature of totalitarianism.

As Edward Heath said - about Tiny Roland - "This represents the unacceptable face of capitalism."

When I examine the doings of such rapacious men as Karl Ican, to me their actions are reprehensibile.

Yes, society and economies need the injection of investment capital: that said, it has to be controlled and regulated.

In the past 20 years we have seen good examples of unfettered greed in scandals such as Tyco, Enron, Northern Rock, Worldcom, and earlier, Michael Milken and Drexel Lambert; Ivan Boesky; earlier still Asil Nadir (Polly Peck); Maxwell.

And now we have the fiasco over Sub Prime and securitised debt: which I wrote about and warned about ten years ago.

We have still to face the hidden downside dangers of the whole insane derivative market: that will be the next Western financial scandal.

It is us, the little guy who pays each and every time: the fat cats are currently sailing the Caribbean in their yachts planning and plotting how next to rob the system!

Whilst this is not totally up to date, it is perhaps sobering to recall just how many financial ramps there have been in recent years...........here.

Finally, the core problem with systemic economic "Growth" is true inflation: quite obviously, GDP has to at least match inflation to stand still!

And, there is growth and growth: for example, if the B of E's MPC were even more stupid than they quite obviously are, then they could drop base rate to 1%: that would, to a degree, stimulate growth: however since LIBOR has had to be rethought, I doubt the interbank market would drop their offering rates by much across the periods.

Predicating the UK economy, for example, on house price boom and importing, wholesaling and multiple retailing created a boom and thus growth: of a sort.

Lots of people, personally, made much money servicing these markets.

Now, however, we see the fraility.

The UK and increasingly the USA are now reaching an insanity where reality is being expressed by the markets and not by the central banks!

It very much reminds me of the West African currency we used to sometimes trade (repatriating capital) where the real (Black Market) rates were perhaps one twelth of the official Central Bank rates: and we even finished up at one stage fronting a large deal for the Nigerian Minister of Justice!

 

[Kitty]

I'm just glad that there are people out there who know what this is all about.  I did try to follow this thread but not with much success.

Question: if the euro fell apart, would the EU follow suit?

[Gluestick]

My forecast, Cathy has been for over ten years that the EU will implode and in all probability become simply a trading bloc as was the EEC and EFTA,  since it will prove impossible to realise the insane dreams of the EU's architects: i.e., common legal systems; common economy; common society; common fiscal structure (i.e. taxation); common army, navy and airforce, etc.

In order to fulfill such vaunting aspirations, will need each and every member state to totally surrender its culture and heritage and most critical of all, its sovereignty.

No chance!

 

[Weedon]

I am a fully paid up member of the "Life's too short society."  As Donald Rumsfeld said, "There are things we know and there are things we know we don't know!"  He did expand quite a bit more on that but as I said, life is too short.

Whether it's euros, pounds, escudos, drachmas or even monopoly money doesn't matter a fig to us at the bottom of the money chain.  If the people who have the power to do something about the currency, for their own advantage, decide to do so, there is sod all we can do about it. 

Best thing to do is concentrate on something you do have control over.  ITV or BBC, vodka or gin, that's enough for my little brain.

[Kitty]

[quote user="Weedon"]

Best thing to do is concentrate on something you do have control over. [/quote]

Husbands?

[Kitty]

Just seen this article - Can Europe defend itself?

http://www.economist.com/world/europe/displaystory.cfm?story_id=11443152&fsrc=RSS

(The answer seems to be 'no'.)

[Gluestick]

Aha!

You have touched on yet another of the EU's frailities, Cathy!

They are so busy building their Ivory Towers and tributes to their own supernal arrogance, they persistantly miss the obvious.

Those who build towers need to also build moats.

To me, the whole matter of the vauting arrogance of the EU is eerily similar to France prior to both WW I and II, where all politicians seemed to think military matters and self-defence were the province of some other guy: or France, again, after the revolution, when the bickering elements seeking political power to fill the vacuum of the monarchy were so busy at self-promotion, everyone seemed to ignore mundane issues like producing food!

Encouraging the worrying Eastern and Slavic states to not only camp on the door but queue up for membership to their exclusive club, is to me rather similar to not just inviting the wolf into the hall, but providing him a favoured spot in front of the fire!

 

[TefkaC]

You have touched on yet another of the EU's frailities, Cathy!

They are so busy building their Ivory Towers and tributes to their own supernal arrogance, they persistantly miss the obvious.

Those who build towers need to also build moats.

 

Who's that Gluey, husbands???

 

Chas......[:D][:D][:)][;-)]

[Gluestick]

Wot?

Sort of Chastity Moats?

[Www]

[Gluestick]

The rape of the UK economy goes on.............

A US private Equity firm are to buy a serious chunk of Bradford and Bingley, which, post the sub prime fiasco and etc has issued a profits warning.

So not content with having ruined the UK mortgage market, the greedy US banker and financiers now want to buy UK financial assets at below value.

To me this is like a man raping a young woman and when no one will employ her as her credibility and reputation has been ruined, he takes her into slavery.

And meanwhile, our "Regulators" sit on their boils and doze.........................

 

[breizh]

I'm a bit confused. Is this aimed at foreign investers, US investers or TPG specifically? Considering UK holdings in foreign companies, US companies and TPG it would be somewhat disingenious to be critical. B&B's business model is centred of mortgage issuing, heavily reliant on external capital. In order to avoid another NR, getting on board a strong partner such as TPG has got to be a good move. You only have to look at what happened to the German Landebanks late last year to see that access to external capital requires a strong partner, or owner, to avoid that funding becoming too expensive, or even drying up. Are you suggesting that the UK Government prescribes who can invest in UK registered companies? I think that SOX shows what happens when over-zealous politicos regulate free markets, companies just up sticks and move to where the business environment is more amenable, I would suggest you only have to look at international shipping with it's flags of convenience to see where you could end up.

However, I do agree with your Euro agruement, but I feel the political capital invested to date will prevent any change (big sigh!)

[Gluestick]

Hedge funds, VCs and private equity outfits are not renowned for their charity.

As McQuarie have demonstrated. With UK water companies of recent.

They are simply corporate raiders.

France like Japan has most sensibly protected core corporate assets (such as EDF-GDF) from rapacious capitalists opportunities to create another Enron.

In the 70s Boom-Bust and again in the 89/90 fiasco and again, now, hot flushes of US money have pillaged personal lending.

Simply buying B and B equity is not going to top up its capital: like all the mortgage lenders, they have dangerously ventured into borrowing on the interbank market and securitising the debt and selling it on. Now, the interbank market is primarily closed and no one wants to invest in MBS products.

Their traditional methodology which lasted since building societies were first created has been lost in the miasma of idiocy.

UK lenders have also broken the first law of banking: lending long and borrowing short.

Since Brown has seen fit to predicate the UK economy and his much vaunted economic miracle (ho hum) on residential property (to the level where it reached 2/3rds of TOTAL UK capital wealth!), unless he now wants to see the whole economy melt down into depression and hyper-inflation, unfortunately certain levels of protectionist action are essential as a result of his financial and fiscal mismanagement.

Nothing more and nothing less.

 

[Kitty]

Ireland make put the brakes on Europe:

http://www.telegraph.co.uk/news/worldnews/europe/ireland/2055562/Irish-referendum-could-scupper-EU-treaty.html