Your Rope (Eur-ope) Definition – a collection of differing economies with Germany at the helm. If you don’t tow their line, you can have your rope and hang yourself economically or threaten to leave the Euro.
OE QE Europe’s getting better. You could ask: did it need the QE announced expected by (super) Mario Draghi on January 22nd? Isn’t QE supposed to support the banking system not act as a catalyst for economic growth? Can QE reach those who want to borrow? Or was it intended to weaken the currency, which it did.
While that might help the peripheral countries, Germany doesn’t need a weaker Euro, it already has the world’s largest current account surplus and it will only get bigger. If Churchill’s dream that a European Union would foster prosperity and reduce the chance of conflict, rising peripheral European country unemployment, which in some cases is around 50% for the under 25s, allied to too cheap a currency for Germany, it hardly portrays the German European ideal in the right light. Germany makes all the right noises about its determination for a united Europe to succeed but needs to walk the walk not just talk. If it wants to reward countries for structural reform before reducing their debt burden, reward Spain – it’s taken plenty of strong economic medicine. But Spanish youth unemployment is still over 50%.
And that ultimately means fiscal transfers. Greece will not be able to pay off its outstanding debt mountain (177% of GDP) nor service it at rates close around 10%. A compromise will likely be arrived at where face values are maintained, maturities lengthened and coupons reduced or turned into zero coupons. That way both Germany and Greece can satisfy their electorates. Alex Tsipras doesn’t have to deliver much; he was elected not just because of his anti-austerity stance but also his stance against corruption that was prevalent in the previous two party dominated political landscape. Greeks had had enough of that. Germany shouldn’t forget the 50% debt write-off it was given in the 1953 London Debt Agreement.
Recent European data is looking better.
Eurozone unemployment continued its gradual downward trend. 11.4% is only slightly down from 12% peak which persisted up until the last quarter of 2013. For Spaniards this means that just under 1 in 4 of the labour force is unemployed, rather than just over 1 in 4. Tallying all the Eurozone unemployed together still leaves over 18 million people looking for work; a population that would be equivalent to the Eurozone’s 5th largest state; a population larger than the Kingdom of the Netherlands. These fragments of good news act as reminders of how long the problem has already dragged on for and how much further monetary union still has to go.
A week before the ECB QE event, the Swiss National Bank (SNB) revalued the Swiss Franc allowing to it freely float having kept a ceiling versus the Euro for 40 months! The resultant approximate 25% appreciation against the Euro (and sterling) in one morning rendered a savage blow to the Swiss tourist industry, blew a massive hole in the Swiss National Bank’s foreign currency reserves and this author’s long weekend in Switzerland. But keeping the Swiss Franc ceiling in place was expensive and would become more so with the announcement of QE by the ECB. Were they forewarned? Theories abound.
What does surprise me was the almost immediate demise of two FX trading companies and reports of further traders and hedge funds in trouble. I recall when the ceiling was put in place over three years ago that the SNB was creating a free option to buy the Swiss currency on a forward basis. That is you buy the Swiss Franc forward against the Euro, get paid the difference in the corresponding short rates (Swiss rates being lower than Euro rates) and wait. While most of this type of investors’ patience had probably run out, it would appear there were plenty of people on the other side of that trade just using the Swiss France as a cheap funding vehicle and taking naked currency exposure in higher yielding currencies!
Meanwhile, the Danes, who have had their currency ‘peg’ against the Euro for longer are getting nervous and cutting interest rates below zero. How they must love their Swiss counterparts who didn’t even consider just raising the level of the ceiling instead of abandoning it. Where would you go on holiday? France or Switzerland?