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The Eurozone Financial Woes - Global Economics Brief

The Eurozone and it's Financial Woes

Global Economics Weekly Brief



The Eurozone - The wrong city and genre for Woody Allen’s latest film. This version was a thriller. European policy makers kept the world on a knife edge until the very last minute of their 11 hour negotiations in Brussels.

There was almost an audible sigh of relief from world markets when the three pronged deal was announced in the early hours of last Thursday morning. Markets initially responded well, but as this fades it suggests the reaction was a triumph of hope over experience. The big decisions and practical arrangements have yet to be made. There has been very limited progress on fiscal union or on policies to boost growth, each of which are essential before confidence can be restored. Achieving this will require lots of hard work, faith and patience. At present there is a legal challenge to the deal which may delay the signing.

Burning the midnight oil in Brussels. European Eurozone policymakers finally thrashed out a deal to address the sovereign debt and potential banking crisis in the Eurozone. It is in three parts: first, private banks holding Greek Euro debt will have to take a hit and accept a 50% loss (or ‘haircut’) on their holdings; second, the European Financial Stability Facility (EFSF) will be leveraged to increase its firepower to around €1tn in order to give markets confidence that there is enough to provide insurance against any future sovereign defaults; and thirdly, Eurozone banks will be told to recapitalise by €106bn to give them an additional cushion should there be a need for more haircuts or downgrades. Markets responded well to start with, but his was short-lived as Italian yields leaped. Clearly the risks are still large, particularly growth challenges in the periphery and whether the boost to the EFSF is enough to provide sufficient liquidity support to the likes of Italy and Spain. The eurozone deal will not stop growth being hit. Plus, Beijing bond plan to raise billions for the eurozone. Also, Europe`s dirty secret - there are many! One being the EU states will never be able to pay for pensions - even if their economies start to boom!

UK consumer and business confidence take a hit. UK consumer confidence dropped sharply in September according to Nationwide, with concerns about current and future job availability seeming to weigh most heavily on their minds. UK business was equally gloomy. The CBI Industrial Trends survey showed the biggest fall in business confidence in two years in October. The major reason for the fall was a lack of orders – particularly exports. Businesses are going-bust every week with more unemployment on its way!

Eurozone downturn worsens in October, but business confidence is flat. The flash estimate of the composite Purchasing Manager Index (PMI) fell further below the magic 50 which signifies expansion. The index fell from 49.1 in September to 47.2 in October, indicating increasing risk of a recession in the common currency area. Confidence in the Eurozone was flat in October, but it remains low. And employment growth slowed to near stagnation. But the biggest worry is that contraction is spreading from the periphery to core economies such as Germany and France, which were the driving force of the region’s recovery at the start of the year. Watch this space for more news - France have financial issues - big time. Germany economy slowing!

China’s manufacturing sector returned to growth in October. In stark contrast to the deteriorating trend in the Eurozone's PMI, the flash reading of China's manufacturing PMI rose from 49.9 to a five-month high of 51.1 in October. Improvements were broad based, but there were particularly encouraging signs on new orders. The total new orders measure rose above 50 for the first time in three months while new export orders expanded for the first time in six. This all adds to the picture of ongoing strength in domestic demand in China and reinforces the upside surprises in September's industrial production and retail sales data.

US GDP growth picks up sharply in Q3. The first estimate of US economic growth showed a sharp pick up in Q3. Annualised GDP growth increased to 2.5%, almost double the 1.3% achieved in Q2. The acceleration was due to a more than threefold increase in the pace of consumer spending to 2.4%, up from 0.7% in Q2; a 16.3% increase in non-residential fixed investment; and 4% annualised growth in exports. With a near empty monetary policy tool box, Federal Reserve Chairman Ben Bernanke will be feeling a little more relaxed about the state of the US economy but will be eager to ensure this doesn't end up being a mere blip on the growth radar.

More bad news in the US housing market. In spite of a small rise in prices during the month, the Case Shiller 20 city index shows US house prices fell at a surprisingly large rate of 3.8%y/y in August. After a short respite in 2010, prices began falling again last autumn and gathered pace throughout the year. US house prices are now 32% below their Spring2006 peak. The implications for the US economy are large. Not only does the level of negative equity affect banks, but the overhang of foreclosed properties for sale is continuing to hinder any serious recovery in new home construction. US consumers are also feeling gloomier. US consumer confidence dropped to its lowest level since March in October 2009.

The Arms Trade is Big Business - therefore a big issue for global safety

Each year, around $45-60 billion worth of arms sales are agreed. Most of these sales (something like 75%) are to developing countries. The 5 permanent members of the UN Security Council (US, Russia, France, United Kingdom and China), together with Germany and Italy account for around 85% of the arms sold between 2002 and 2009. Some of the arms sold go to regimes where human rights violations will occur. Corruption often accompanies arms sales due to the large sums of money involved.

Corruption
We often hear leaders from rich countries telling poor countries that aid and loans will only be given when they show they are stamping out corruption. While that definitely needs to happen, the rich countries themselves are often active in the largest forms of corruption in those poor countries, and many economic policies they prescribe have exacerbated the problem. Corruption in developing countries definitely must be high on the priority lists (and is increasingly becoming so in the wake of the global financial crisis), but so too must it be on the priority lists of rich countries.

We have another global crisis that needs urgent attention by skilled and experienced people who can do the job right!


Storm warning: As the European debt crisis spreads across the continent, the outlook for the single currency has never looked so grim. Financial markets fluctuated violently as fears that Italy, Spain and France now, plus Germany in the future will be dragged into the eurozone debt crisis triggered another day of turmoil for investors.
The causes of the credit crisis in a short, engaging video: click on the link below;

The Crisis of Credit Visualized


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`Building An Excellent Business!` is available for immediate purchase by visiting the secure Cavendish eStore online at: http://www.cavendish-mr.org.uk - customers can download this e-book in PDF Acrobat format immediately after purchase.

More Economics and Business Inspiration:
`Accelerate with Impact` -
by Colin Thompson ISBN: 978-1-84549-289-2

Accreditation: UK Registered Learning Provider:10025755

ENDS
Note: About the Author Colin Thompson

Colin is a former successful Managing Director of Transactional/Print Manufacturing Plants, Print Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives and Non-Executive Director, helping companies raise their `bottom-line` and `increase cash flow`. Plus, helping individuals to be successful in business and life in general. Author of several publications, research reports, guides, business and educational models on CD-ROM's/Software and over 400 articles published on business and educational subjects worldwide. International Speaker and Visiting University Professor.

The Eurozone Financial Woes and YOU!

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