The credit crunch could crush the euro

Telegraph (UK) ^ | December 3, 2007 | By Liam Halligan

[DeaconBenjamin]

The credit crunch is hammering the US, which now faces a likely recession. Things don’t look great for the UK either; here growth could plunge to 1 per cent next year. # News and analysis on the credit crisis

There is a near-consensus among economists, in fact, that the Anglo-Saxon world created this credit crunch and will likely bear the most pain. advertisement

The eurozone, it is widely assumed, has been less affected by sub-prime. Most investment banks predict the 13-country region will out-perform the UK in 2008.

A slew of recent data tells me we should now question that assumption. If I’m right, and the eurozone does a face serious drop, us Brits would be foolish to grin. We like to revel in Continental misfortunes, but the single currency area matters hugely – accounting for three-fifths of UK trade, more than four times as much as the States.

The reason the eurozone now worries me is the emerging picture of sharply rising consumer prices on the one hand, and falling output on the other. Just like the Bank of England, the European Central Bank will on Thursday try to set monetary policy not only to deal with inflation, but also bolster growth.

Eurozone base rates are likely to be held at 4 per cent – for the sixth month in a row. Most observers think if they do shift this week, the only possible move is up.

That’s because, despite the credit crunch, the ECB’s rhetoric has remained very hawkish. But, in reality, eurozone policy makers now face a classic growth-inflation dilemma – one they share with other Western central banks.

The ECB’s predicament is made worse, though, by the euro/dollar exchange rate, and the single currency’s structural flaws. These two unique aspects of the region’s quandary are why its prospects are more gloomy than assumed.

Evidence that eurozone growth is souring is now coming thick and fast. In Germany, the region’s powerhouse, retail sales fell 3.3 per cent between September and October we learnt last week – with consumer spending frail in many other member states too. Europe’s bellwether Economic Sentiment Indicator also fell for the sixth consecutive month.

With weakening global demand slowing industrial growth, the eurozone’s crucial manufacturing sector is starting to suffer as well. The closely-watched IFO index of German business sentiment is well below its December peak. Europe’s PMI industrial index has also dropped close to 50 – a value which, in previous years, has provoked interest rate cuts.

But the ECB will have a big problem lowering rates this Thursday – or anytime soon – because eurozone inflation jumped to 3 per cent in November, up from 2.6 per cent the month before. Inflation has almost doubled since the summer – with rising oil and food costs causing consumer prices to balloon.

Germany’s CPI grew 3.3 per cent last month – a 13-year high. And price pressures elsewhere mean eurozone inflation will stay above the ECB’s 2 per cent target for months to come.

Then, of course, there’s the US currency – that is, the impact of the feeble greenback on the euro. Over the last year, the single currency has risen more than 15 per cent against the dollar, which has seen investors dump US assets. This makes European leaders see red, of course, as a rising currency undermines exports and jobs.

Some say such protests are overdone. After all, a stronger euro dulls the impact of more expensive oil. Dollar oil prices have risen 90 per cent since January, compared with 60 per cent in euros.

The eurozone also sends less than a tenth of its exports to the US. So, on a trade-weighted basis, the euro is up only 7 per cent against the dollar since January – less than half the straight euro-dollar rise.

[DeaconBenjamin]

You rang?

[VxH]

[You are right but I don’t think that’s the reason for the credit market drying up.]

 

Cycles man, Cycles and Timing...

 

 

AlGore's Great-Great-Great-Great Uncle AzGore hoodwinks the sheeple by "Making the Sun Go Dark".