This site goes on where the book had to stop. Apart from the long history of the euro (did you know the first proposal for a European currency was made as far back as 1929?), in my book I have written extensively on the experiences with the euro in its first ten years of existence and its effect on the economic growth in the eurozone.
The most important part of the book is the outlook for the future. Can the euro challenge the dominant role of the dollar in the world economy or will it struggle to survive, as the economic and political differences between various eurozone countries remain high (and even increase further)?
In all those fields, there are new developments, almost on a daily basis. On this website I try to follow them. You will find articles and analyses varying from the outlook for the exchange rate of the euroagainst various other currencies via economic data and news from the eurozone to the issue of the enlargement of the eurozone with countries in Central and East Europe.
As you can see - please feel free to look around - most of the site is in Dutch. However, soon I intend to expand this recently launched English-language part of the site, with much of the content translated into English.
If you would like to be well-informed about European economic and monetary affairs, take a few seconds to put www.allesovereuro.nlin your Favorites and I hope to see you back soon.
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Should you have any comments, questions and suggestions, I would love to get in touch with you. Send an e-mail to:edin@allesovereuro.nl
Earlier this week, rating agency Moody's published its annual report on Ireland. In it, Moody’s states that before the crisis "the banking industry and housing have been the main engines for economic growth, driven by low interest rates and low risk.’
The same applies to Spain. There is however one important difference: Ireland is a relatively small euro country compared with Spain. How bad the Spanish economy fares is of great influence to the rest of the euro area because Spain is the fourth largest economy of the currency union.
If Spain in deep trouble, that will indeed affect the eurozone. And things are not going well in Spain. Just like the rest of the euro area, the Spanish economy also is in a recession. However, the unemployment rate is expected to increase to over 20 percent. A rather large difference compared with for example the Netherlands, with a forecasted increase of the unemployment to 8 percent next year.
Where might the danger for the euro(area) come from? These are some possible channels:
- Spain has two members on the board of the European Central Bank (ECB). Will they fight for long-term low interest rates in the eurozone because of the economic troubles in their homeland? If they succeed, that could lead to a new bubble or inflation down the road. If they fail, there will also be damage, namely disagreement within the ECB, which is not a good news for the exchange rate of the euro.
- Investors may wonder whether Spain will be able to meet its interest and repayment obligations. That would push up long-term interest in Spain, sending the economy even deeper into trouble. The risk of unrest within the ECB (see above) will then increase further.
- Investors can also think: well, if Spain could get into trouble, the same might happen to Italy as well. Italy, not exactly the most prosperous and efficient economy in the eurozone, is the third largest economy of the currency union. The Italian interest rates would increase, and worsen the situation further (the same goes for Greece and Portugal).
- Two of the four largest economies of the eurozone in deep problems is not good news for the rest of the eurozone, which mainly relies on export for economic growth.
- Like Spain Italy also has two board members within the ECB. Together that makes four, a decent power group, certainly if we add the Greek members (also two) and central bankers from Portugal and Cyprus.
This will be a hard guarantee for instability of the euro and will again raise questions about the viability of the currency in the longer term.
Euro Approaches 3-Week High After German Retail Sales Rise
Sept. 1 (Bloomberg) -- The euro approached a three-week high against the dollar after a German report showed retail sales increased for the first time in three months, adding tosigns the 16-nation region is emerging from recession.
The euro gained for the first time in six days versus the yen as the Federal Statistics Office in Wiesbaden said sales, adjusted for inflation and seasonal swings, rose 0.7 percent in July after a 1.3 percent drop in June.
“An improvement in retail sales could be a plus for the euro-zone economy,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’slargest currency broker. “The euro may trade in a firm manner.”
Europe’s currency rose to $1.4361 as of 7:39 a.m. in London from $1.4334 in New York yesterday. It touched $1.4406 on Aug. 27, the strongest level since Aug. 7. The euro climbed to 133.66 yen from 133.48 yen. The dollar was at 93.08 yen from 93.12 yen.
European Central Bank Governing Council member Ewald Nowotny said yesterday he doesn’t expect a double-dip recession in the euro region as long as policy makers don’t hurry to remove emergency stimulus measures.
“I don’t see a perspective of a W-shaped recession if there’s no premature exit strategy,” Nowotny said in a panel discussion in Alpbach, Austria. “What I see is the danger thatwe’ll have very low rates of positive growth for some time.”
The ECB will keep its main refinancing rate at 1 percent at its Sept. 3 meeting, according to all 58 analysts surveyed by Bloomberg.
Source: Bloomberg
European Consumer Prices Decline Less Than Forecast
Aug. 31 (Bloomberg) -- European consumer prices dropped less than economists forecast in August as the economy recovered from the deepest slump in six decades.
Prices in the 16-member euro region fell 0.2 percent from the year-earlier month after declining a record 0.7 percent in July, the European Union statistics office in Luxembourg said today. Economists predicted a 0.3 percent decrease, according to the median of 36 estimates in a Bloomberg News survey.
Inflation may accelerate as the global economy emerges from the worst recession since World War II, stoking demand and driving up the cost of crude oil and other commodities. TheEuropean Central Bank has warned that the recovery may face obstacles as rising unemployment curbs consumer spending and helps keep a lid on prices.
Consumer prices in Italy, the euro region’s third-largest economy, unexpectedly increased 0.2 percent in August from a year earlier, the Italian Statistics Institute in Rome said today. Economists forecast a 0.1 percent drop, according to the median forecast of 15 projections in a Bloomberg survey. Italian retail sales unexpectedly fell 0.4 percent in June from May,according to a separate report.
Consumers in Europe anticipate prices will decline more steeply in the next year than they did in July, while companies’ projections are less negative than a month ago, a EuropeanCommission report showed on Aug. 28. A gauge of consumers’ price expectations over the next 12 months fell to minus 16, the lowest since the data were first compiled in 1990.
While oil prices are down about 40 percent from this time last year, they have more than doubled from a February low of $34 a barrel. In Germany, Europe’s largest economy, energyprices increased in August from July and helped to boost the annual inflation rate, which unexpectedly rose to zero.
Source: Bloomberg
Nordics to Outperform Euro Area, Raise Rates Sooner, UBS Says
Aug. 28 (Bloomberg) -- Sweden and Norway will enjoy a faster economic recovery than the euro area, boosting their currencies, as policy makers raise interest rates earlier than the European Central Bank, UBS AG economist Sunil Kapadia said.
“These countries will be very early hiking rates,” Kapadia said in a telephone interview out of London yesterday. “We’re very bullish on the Nordics and recent data have supported that view.”
Sweden’s export-led slump has forced companies including appliance maker Electrolux AB and truckmaker Volvo AB to cut thousands of jobs. As recovery spreads across Europe and trade demand returns, export-reliant economies will be the first to bounce back, according to Kapadia. Norway, the world’s fifth-largest oil exporter, has already emerged from its recession as continued investment in its petroleum industry supports demand.
“Norges Bank will start raising rates early next year and possibly even by the end of this year and will be at 4 percent by the end of 2010 -- we’re very hawkish,” Kapadia said. “The
Riksbank will start in the second quarter next year and be close to 2 percent by the end of 2010.”
The Swedish Riksbank’s key rate has been at a record low 0.25 percent since July 2. The bank has signaled the rate will remain there for another year. Oslo-based Norges Bank has kept its key rate at a record-low 1.25 percent since June 17. The bank said on Aug. 12 the improved economic outlook may prompt it to raise rates sooner than mid-2010, as previously indicated. The ECB’s benchmark is at 1 percent.
Rate Increases
Faster rate increases will help support the two countries’ currencies, which have suffered as the financial crisis prompted risk-averse investors to drop holdings in smaller markets and turn to more liquid assets.
The Swedish krona lost 14 percent against the euro last year, while Norway’s krone slumped 18 percent against the single currency in the same period. The krona is up 7.3 percent against the euro this year, compared with the krone’s 12 percent gain.
“The Swedish krona is appreciating from where it’s been. It’s still undervalued. There may be a correction underway,” Kapadia said. “The Norwegian krone is also undervalued. We expect to see some upside there in the next 12 to 18 months.”
Euro Rises, Heads for Second Monthly Gain, on Recovery Optimism
Aug. 28 (Bloomberg) -- The euro rose, headed for its first two-month advance against the dollar since March 2008, on growing evidence Europe is emerging from its worst recession in
the post-World War II period.
The 16-nation currency gained for an eighth day versus the pound, its longest streak in four years, before a European report forecast to show business and consumer confidence rose to the highest level in 10 months.
“The euro-zone economies look like they’re starting to recover,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “The euro is easy to buy, given higher interest rates there than in the U.S. and Japan.”
The euro rose to $1.4352 as of 7:30 a.m. in London from $1.4341 in New York yesterday, when it reached $1.4406, the highest level since Aug. 7. The currency has advanced 0.7
percent this month. It climbed to 134.54 yen from 134.14 yen, and strengthened to 88.15 British pence from 88.07 pence.
Executive, Consumer Sentiment
Europe’s single currency strengthened as an index of executive and consumer sentiment in the 16-nation region climbed to 78 in August, the highest since October, from 76 in July, according to a Bloomberg News survey of economists. The European Commission will release the data today in Brussels.
European Central Bank board member Mario Draghi said on Aug. 26 that the global economy appears to be recovering from its first recession since World War II even though “strong
uncertainties” remain.
Iceland Central Bank Signals No More Rate Cuts on Krona Concern
Aug. 28 (Bloomberg) -- Iceland’s central bank signaled it won’t lower interest rates further after capital controls failed to prevent the krona from weakening.
Policy makers at Reykjavik-based Sedlabanki said the “absence of a significant intermittent recovery” of the krona was a “matter for concern,” adding that there is a “strong case against lowering interest rates further,” according to the minutes of the Aug. 13 meeting, at which the benchmark was left unchanged at 12 percent.
Iceland’s economic collapse, sparked by the failure of its biggest banks in October, forced the island to impose capital restrictions to prevent a sell-off of the krona. Those controls weren’t enough to prevent the currency losing 10 percent against the euro since the end of March, making it the second-worst performer of the 26 emerging currencies tracked by Bloomberg.
The Monetary Policy Committee “agreed on the need to provide sufficient return on krona assets, which would affect both the incentives for circumvention of the capital controls and exporters’ incentive to convert their foreign exchange earnings into krona denominated assets,” according to the minutes.
Bank Governor Mar Gudmundsson, who took office on Aug. 20, said on Aug. 26 that the bank’s main challenge is to “find opportunities to bring down interest rates with domestic economic circumstances in mind, without putting pressure on the exchange rate of the krona and at the same time start the process of removing capital controls.”
The economy will contract 9.1 percent in 2009 as household spending falls 19.7 percent and investment slumps 48.4 percent, the central bank said on Aug. 13.
Iceland has recently applied for membership of the European Union and hopes to be able to introduce the euro soon after the accession.
Source: Bloomberg / allesovereuro.nl
Estonia Needs More Budget Cuts for Euro, Central Bank Says
Aug. 26 (Bloomberg) -- Estonia’s government needs to further cut this year’s budget deficit to be able to adopt the euro from January 2011, the central bank said.
The shortfall needs to be reduced by as much as 3 billion krooni ($275 million), double the previous estimate given by the central bank in June, the Tallinn-based Eesti Pank said in a monthly economic policy statement today. Risks of higher-than- expected spending on local governments and unemployment measures and lower-than-forecast non-tax revenue “have become more serious in recent months,” the bank said.
The Baltic country is trying to keep its overall budget gap at last year’s level of 3 percent of gross domestic product to be able to adopt the euro from January 2011. Prime Minister Andrus Ansip says the currency switch will attract new investment and help the former Soviet republic recover from its worst recession since independence in 1991.
Standard & Poor’s on Aug. 11 lowered Estonia’s long-term credit rating to A-, four notches above non-investment grade, on concern the country’s efforts to lower its reliance on external financing may scupper its euro-adoption target. Estonia’s financial sector net external debt is 67 percent of current- account receipts, the highest among all similarly rated sovereigns, S&P said.
Ansip’s minority Cabinet has cut the 2009 budget deficit by 16 billion krooni ($1.4 billion), or 7.3 percent of GDP, this year to avoid depleting state reserves. It made the cuts to keep the fiscal deficit at last year’s level of 3 percent of GDP, in line with EU rules. The Finance Ministry is due to release updated budget forecasts tomorrow.
Estonia’s $23 billion economy contracted an annual 16.6 percent in the second quarter, the deepest fall on record dating back to 1994. The country may emerge from the worst of the recession this quarter after contracting in six straight quarters, the Finance Ministry said this month.
Source: Bloomberg
Dollar May Keep Falling, Yuan Gain, Strategists Say
Aug. 26 (Bloomberg) -- The dollar will continue to weaken this year as the global economy recovers from recession and investors seek currencies linked to growth, strategists said in a panel on Bloomberg Radio.
“Investors in the U.S. and globally are sitting in too many T-bills and too much cash,” said Rebecca Patterson, global head of foreign exchange at JPMorgan Private Bank in New York. “As the world slowly gets better, they are going to want to take advantage of that. They want a better yield than you get in a T-bill, and that keeps the dollar under pressure.”
The dollar has weakened this year against 13 of the 16 most-traded currencies tracked by Bloomberg. Currencies tied to commodities and growth, such as the Brazilian real, South African rand and Australian and New Zealand dollars, gained the most against the greenback. U.S. Treasury notes and bills due in one year and less returned investors 0.4 percent this year, according to a Merrill Lynch & Co. index.
“We are still in the camp that the dollar has further downside to go,” said Callum Henderson, global head of currency strategy at Standard Chartered in Singapore. “You’ll see a renewed period of downside for the dollar, but more positively, upside for high-yielding emerging market and developed market currencies.”
“In Europe, we have a much stronger economic outcome as many people believed,” said Hans-Guenter Redeker, the London- based global head of currency strategy at BNP Paribas SA. “German and French growth numbers have been a pleasant surprise for the second quarter.”
Redeker said the euro, which gained 2.3 percent against the dollar this year, may strengthen to $1.50. The euro traded at $1.4296 at 7:08 a.m. today in Tokyo.
JPMorgan’s Patterson said there are better ways to take advantage of increased risk appetite as the global economy recovers than investing in the euro.
“I look at the euro and I say the worries about the deficit and U.S. debt are mirrored in Europe,” Patterson said. “The euro doesn’t have the same reserve currency support that the dollar has. For a short-term trade, it’s fine. For a long- term diversification tool, I’d stay away from it.”
Reserve Role
The U.S. dollar may weaken as governments worldwide reduce the currency’s role in their foreign-exchange reserves, said David Wyss, chief economist at Standard & Poor’s.
“We do expect a bit of dollar weakness and expect the dollar won’t be as dominant in world reserves as it has been in the recent past,” he said today in Sydney at a conference. “It will still be the biggest reserve currency but we will go back to a more normal distribution, back to more like what we had 10 or 15 years ago when the dollar was 70 percent of reserves instead of 90 percent of reserves.”
China’s Domestic Demand
Strategists also said China’s ability to continue growth will depend on the nation changing from an economy driven by exports to one expanding on domestic demand, which may increase the value of the yuan. The People’s Bank of China said today in its 2008 annual report that the yuan’s exchange rate will be kept at a “reasonable and balanced” level.
“Asia is at a tipping point where you’ll see a transition from export-led growth to domestic-demand growth,” Standard Chartered’s Henderson said. “We’ve already seen the first stage with a huge focus on domestic demand, a huge focus on consumption. The next stage is surely a move away from a cheap currency policy toward stronger trade-weighted currency appreciation in order to dampen consumer costs.”
The pound may have to weaken for the U.K.’s economy to recover from recession, Paribas’ Redeker said. GDP contracted 0.8 percent from the in the second quarter from the first, twice as much as economists forecast.
“When you look at the situation in the British economy, it is very obvious you need substantial contributions from net exports in the next five to 10 years,” Redeker said. “That means the U.K. will have to adjust its cost structures drastically or operate with a much cheaper exchange rate.”
Source: Bloomberg
Government Spending Lifted Germany Out of Recession
Aug. 25 (Bloomberg) -- Government spending lifted Germany out of its worst recession since World War II, a breakdown of second-quarter gross domestic product shows.
Government spending rose 0.4 percent from the first quarter and helped to boost private consumption, which gained 0.7 percent, the Federal Statistics Office in Wiesbaden said today. Construction investment increased 1.4 percent. GDP advanced a seasonally adjusted 0.3 percent, the office said, confirming an initial estimate from Aug. 13. The unexpected return to growth in Europe’s largest economy followed four quarters of contraction.
Chancellor Angela Merkel, who faces national elections next month, has approved spending of about 85 billion euros ($121 billion) to rekindle growth, including a 2,500-euro payment to people who scrap their old car and buy a new one and subsidies for companies to hold on to workers when orders are slack. Governments around the world have pledged about $2 trillion in stimulus measures to pull the global economy out of recession.
“It was government spending that revived the sick man of Europe,” said Andreas Scheuerle, an economist at Dekabank in Frankfurt. “The domestic cash-for-clunkers scheme revived private consumption while global stimulus packages helped boost net exports. The question now is whether the recovery will be sustained once the programs run out.”
Germany’s car scrappage scheme, which the statistics office said was the main contributor to private consumption in the second quarter, expires at the end of the year.
Net trade made the biggest positive contribution to GDP in the quarter because exports declined less than imports, the office said. Exports fell 1.2 percent from the first quarter while imports retreated 5.1 percent.
“We will see a real pick-up in exports in the second half of the year,” said Alexander Koch, an economist at UniCredit Group in Munich. “Demand is broad based and thankfully also includes demand from the euro area, which is Germany’s biggest trading partner.”
Euro-Region Recession
The economy of the 16 nations sharing the euro barely contracted in the second quarter after France also returned to growth. Gross domestic product fell 0.1 percent, the European Union’s statistics office in Luxembourg said Aug. 13.
Data over the past week suggest the economy is gathering strength. German service industries unexpectedly expanded this month, a survey of purchasing managers showed Aug. 21, and the ZEW investor confidence index jumped to the highest level in more than three years. Germany’s benchmark DAX share index yesterday rose to an 11-month high.
European Central Bank officials have cautioned that an increase in unemployment may still restrain consumer spending and growth.
“We see some signs confirming that the real economy is starting to get out of the period of freefall,” ECB President Jean-Claude Trichet said at the U.S. Federal Reserve’s annual symposium in Jackson Hole, Wyoming, on Aug. 22. This “does not mean at all that we do not have a very bumpy road ahead of us.”
The German jobless rate will rise to 10.5 percent in 2010 from 8.3 percent today, according to the Bundesbank.
“The labor market is the one big unknown in terms of what will happen to German growth in the next few quarters,” said Carsten Brzeski, an economist at ING Group in Brussels. “The good news is that the German recession is over and will remain over.”
Source: Bloomberg
Germany’s Budget Swings to $24.7 Billion Deficit in First Half
Aug. 25 (Bloomberg) -- Germany’s budget swung to a 17.3 billion-euro ($24.7 billion) deficit in the first half of this year as the government boosted subsidies for companies to keep workers on the payroll during the recession.
Spending by Germany’s federal, state and local governments rose 3.5 percent and revenue fell 1.1 percent compared with the first half of 2008, the first decline since 2004, the Federal Statistics Office in Wiesbaden said today in a faxed statement.
Tax revenue fell 3.8 percent compared with the first half of 2008, led by a 46 percent drop in corporate tax, the data showed. Subsidies rose 11.2 percent, mostly because of a government program that pays the employer’s share of social security contributions at companies that keep workers on the payroll when orders are slack.
Source: Bloomberg
This is my reaction to the special on the eurozone by The Economist
Dear Sir,
I have enjoyed reading your special report on the euro area in The Economist (June 13th-19th 2009). As a monetary economist myself I have followed the work towards a monetary union in Europe very closely.
In your report, you correctly state that the idea of a single moneay in Europe goes a long way back. Sadly, you then mention Jacques Rueff and his words from 1950s. The idea was however mentioned decades before that, by a German statesman (and Nobel laureate) Gustaf Stresseman. In 1929, speaking in New York before the representatives of countries within a body that would emerge as United Nations later, he asked the question ‘where is the European currency and a European stamp?’ He went on to say that those things will have to come. The stamp is nowhere to be seen, but ‘his’ currency is a fact of life now.
I do hope the euro will live forever, but, sadly, I am not so sure about it as you are. It is a shame that you write that ‘that (euro area collapsing or some members leaving it) kind of thinking is found mostly among those who were doubtful that the euro would ever get off the ground in the first place’. That is too simplistic and above all incorrect. Various pro-euro economic think tanks, such as the Centre for European Reform, and prominent economists such as Kenneth Rogoff, former chief economist at the International Monetary Fund, have not dismissed that scenario. You could hardly argue that the CER and Mr. Rogoff were ‘amongst those who were doubtful that the euro would come off the ground in the first palce’.
You conclude that the fact that many European nations are rushing to join the euro area is a vote of confidence. You could also compare it with a walker in the New Zealand Alps who finds himself in the midst of a severe storm. Just ahead is a very damaged house-like structure. He will run to it fast, but just to hide himself. It will hardly be a place where he would like to stay after the storm calms.
The creation of the euro was a milestone. It was also an example of the fact that nothing is absurd. Just as a scenario that, perhaps somewhere in the distant future one or more members of the euro area will choose, for
whatever reason, to leave the euro. For years to come the cost / benefit analysis will show, as was the case in the last 15 years, that costs are much, much lower than the benefits of sharing one currency with other
nations. That analysis, however, could change.
