A press release from Standard
and Poors yesterday highlights the stresses on the ECB in relation to the value
of the Euro. In a diverse grouping of states, some of which are not even in the
Euro zone, even if they are members of the Union, matters of economic and
monetary policy are bound to be complex.
S&P’s economist, Sophie
Tahiri, seems to have reached the conclusion that anything approaching
Quantitative Easing (QE) in relation to the Euro is very much on the back
burner at present. She does this by reference to the Euro Overnight Index
Average (EONIA) and the spreads between 10 year German Bunds and U.S.
Treasuries.
It is also true that while
monetary easing might have an effect on deflationary pressures, which will be
pushed back against by the Bundebank on the grounds that they hate inflation, it
will do next to nothing for the real economy. Buying sovereign bonds will
reduce yields, but as most businesses in Europe rely on bank lending rather than
corporate bonds, unlike in the USA ,
a European style QE would do nothing for the small to medium sized businesses
that are the backbone of European employment. A recent report in the Financial
Times highlighted the fact that, even though ECB base rates now stand at 0.25%,
bank borrowers in EU member states outside of Germany are forced to pay as much
as 6% per annum for the privilege of
taking on bank debt. That is, of course, if they can obtain it in the
first place.
For all those reasons there
is a growing consensus that even if the ECB is considering easing, it will not
do anything to bring it on until the forthcoming European bank stress tests are
completed, and that will be well on into 2014, if not at the end of the year.
Tomorrow (Wednesday) sees the release of the Consumer Price Index in the Euro
zone. A low reading here will make things more difficult for the ECB.
A stronger Euro
In recent times the Euro has
shown remarkable resilience. A lowering of core interest rates by the ECB last
year, threats of making the overnight deposit rate a negative figure and as
much rhetoric for a reduction in the value of the Euro as could be mustered by
various personalities in European economic circles have all been shrugged off
by the market.
Theories abound as to why
this should be the case. One that has surfaced recently is that the threat of sanctions
on Russia
has motivated that country to sell its US dollar holdings and convert them to
Euros. There is also talk of a rebalancing of Chinese foreign reserves that
serves to strengthen the Euro.
That may well be that case
but the truth might be more mundane. Now that it has been established that the
peripheral states, led by Greece, which were regarded as a risk to the whole
Euro zone edifice a relatively short time ago, will be supported by the centre
no matter what, their sovereign bonds represent particularly good value, with
yields that exceed German bunds but which can now be seen almost as a proxy for
them. In order to invest in the bonds of Euro member states, it is necessary to
buy Euros. This, naturally, pushes up its value.
Conclusions about Euro QE
being a non event should also tend to keep the Single Currency in an elevated
state.
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