MacroScope

Time to promote the EU?

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Member states of the European Union like to think of themselves as partners, sharing in a common future. But when it comes to business, things tend to go by the board. Consider, for example, the scramble to outdo each other in attracting  investment from outside the bloc.

Jose Guimon, a lecturer in international economics at the Universidad Autonoma de Madrid, reckons this should change. In a new paper for the Vale Columbia Centre on Sustainable International Investment, Guimon says it is time for an EU Investment Promotion Agency.

What he has in mind is something along the lines of  Invest in America, the U.S. government’s attempt to coordinate promotion of the United States as a desitination for foreign direct investment.

The EU IPA should focus solely on efforts to promote the EU as a whole. It could develop a website and materials to provide information about the strengths of the EU in different sectors or about the regulatory regime and incentives available at the EU-level. It could provide support to foreign investors, for example helping to find suitable business partners or suppliers or to comply with EU-level competition regulations. It could also aim at stimulating collaboration and synergies among national IPAs, for example by organizing joint seminars and missions abroad. Finally, it could play an important policy advocacy role in Brussels, by suggesting possible solutions to the business climate concerns of foreign investors.

The difficulty, of course, would be to persuade fiercely competing countries that it is a good idea to pool resources. Guimon appears acutely aware of this and says his proposed agency would have to be neutral, extolling the virtues of the EU as a whole and simply referring potential foreign investors to relevant national bodies.

Lack of debt Estonia’s undoing?

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Low public debt would usually be a good thing, but it might throw a spanner in the works of Estonia‘s quest to join the euro zone.

The small Baltic country has a stable currency, its deficits and inflation meet European Union rules, and its top policymakers exude confidence the country will adopt the euro next year.

But with government debt below 10 percent of gross domestic product (GDP), Estonia has not needed to issue a benchmark bond — a government bond issued in Estonian kroons for at least 10 years — which it could use to show it has low and stable interest rates, one criteria for euro candidates.

Is Rehn the EU Commission’s Carrie Bradshaw?

OlliRehn The new European Union Economic and Monetary Affairs Commissioner Olli Rehn likens himself to Carrie Bradshaw, the lead character in television show Sex and the City, and thinks his small hometown in Finland is the centre of the world.

“I’d be Carrie, I guess, since I like to write,” he told the Finnish newspaper Helsingin Sanomat when asked about which character in the show he most resembles.

In the TV series, the promiscuous Bradshaw searched for true love and its meaning in the contemporary world in her newspaper column.

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But while Bradshaw — played by Sarah Jessica Parker — thought her native New York was the centre of world and felt out of place in Paris, Rehn set her straight.  “The world revolves around Mikkeli,” Rehn said, referring to his hometown with a population of 49,000 in southeastern Finland.

Never fear, Jean-Claude is here

Any doubts about financial markets’ faith in European Central Bank  President Jean-Claude Trichet’s cure-all ability should trichetfeb9have been put to rest  after a euro flurry over Trichet cutting short a visit to Sydney to return to Brussels for a meeting of European Union leaders.

The euro recovered from 8-1/2 month lows against the U.S. dollar after the Reserve Bank of Australia said Trichet would leave anniversary celebrations early, as traders bet that his  rush to Brussels meant an increased chance of  European leaders agreeing  a rescue deal for struggling  Greece.

When the ECB later clarified that Trichet had been invited to the Thursday meeting last month and had adjusted his flight plans at the last minute to make a connecting flight, the single currency slipped back 20 ticks to just under $1.37.

Political economy and the euro

The reality of  ‘political economy’  is something that irritates many economists – the ”purists”, if you like. The political element is impossible to model;  it often flies in the face of  textbook economics;  and democratic decision-making and backroom horse trading can be notoriously difficult to predict and painfully slow.  And political economy is all pervasive in 2010 – Barack Obama’s proposals to rein in the banks is rooted in public outrage; reading China’s monetary and currency policies is like Kremlinology; capital curbs being introduced in Brazil and elsewhere aim to prevent market overshoot; and British budgetary policies are becoming the political football ahead of this spring’s UK election. The list is long, the outcomes uncertain, the market risk high.

But nowhere is this more apparent than in well-worn arguments over the validity and future of Europe’s single currency — the new milennium’s posterchild for political economy.

For many, the euro simply should never have happened –  it thumbed a nose at the belief that all things good come from free financial markets; it removed monetary safety valves for member countries out of sync with their bigger neighbours and put the cart before the horse with monetary union ahead of fiscal policy integration. But the sheer political determination to finish the European’s single market project, stop beggar-thy-neighbour currency devaluations and face down erratic currency trading meant the  currency was born and has thrived for 11 years.

The euro gets a warning shot of Greek fire

Juergen Stark , Germany’s ECB executive board member, is well known as a true believer in tight fiscal discipline, so his reported comments in Italy’s Il Sole 24 Ore about not bailing Greece out of its financial difficulties are not out of character. But the market reaction must have at least given pause for thought to EU leaders wondering how far to go in coddling their wayward child.

Within moments of Stark’s reported musings that markets were “deluding themselves” if they thought member states would “put their hands in their wallets to save Greece”, hitting the foreign exchange rooms, the euro was on a tumble.  It hit a low of $1.4285 from a day’s high of $1.4371 – which doesn’t sound like a lot, but is, especially over a very short period of time.

It is true that it recovered very quickly and that other EU notables have hinted that EU member states will indeed bail out Greece if needed (they are unwilling to say so explicitly for fear of taking too much pressure of the Greek government and the Greek public). And it is not really up to the ECB anyway.

from Global Investing:

Can the euro zone survive Greece?

Wolfgang Munchau, co-founder and president of Eurointelligence, has raised an uncomfortable prospect for investors in Greece. In a Financial Times column today, the long-time Europe commentator argues that Brussels may not be willing to bail Greece out if it were to default on its debt à la all-but sovereign Dubai World is about to.

The EU’s authorities, rightly or wrongly, are more afraid of the moral hazard of a bail-out than the possible spillover effect of a hypothetical Greek default to other eurozone countries. If faced with a choice between preserving the integrity of the stability pact and the integrity of Greece, they are currently minded to choose the former.

Munchau reckons that outright default is unlikely, but wonders whether the current spread between Greek and benchmark German bonds really reflects the risk that investors are taking.  It is currently around 178 basis points after recovering from a blow out on Dubai worries last week.

We can’t all be Finns

How well is your finance minister doing as the global economy comes tumbling around your ears? Finns, at least, can hold their heads up with pride: Jyrki Katainen (pictured on ice) has topped The Financial Times’ annual rankings of European finance ministers.

Nineteen ministers were judged on their economic performance, political performance and their country’s financial stability. The latter was based on the cost of buying insurance against default on money borrowed by the government, politics on what a panel of economists saw as lucidity, leadership and so on, and economics on a wide range of macro factors. Katainen triumphed primarily on economics with the FT citing a projected healthy budget surplus next year.

Results for the G7 members of the group were mixed. Germany’s Peer Steinbruck came second, despite a poor showing on politics, and France’s Christine Lagarde was seventh. Britain and Italy languished at 14 and 16, respectively, although at least UK Chancellor of the Exchequer Alistair Darling can boast of coming first in politics. Something to do with élan, apparently.

 

Not gloomy enough

The European Commission has been pretty gloomy about the prospects for European Union economies in recent days. Its latest forecast last week was for the 15 countries of the euro zone to grow by just 0.1 percent next year. For the 27-nation EU as a whole – this time incorporating the likes of Britain, Poland and Sweden – the number was only slightly better at 0.2 percent.  In fact, the Commission said the outlook was bleak. “The horizon,” said Monetary Affairs Commissioner Joaquin Almunia, “is dark.”

Simon Tilford, chief economist at the Centre for European Reform, reckons it may be even darker than the Commission expects. The Commission, he says in an article, has a tendency to be slow to downgrade its forecasts, and much of what it said last week was already looking out of date when released. “The indications of an unprecedented slump in economic activity are multiplying all the time.”

Tilford reckons the forecasts for Germany and Spain — the euro zone’s first and fourth largest economies, respectively – are among the most out of sync. Germany, for example, is seen standing still. But Tilford asks where such strength as even that will come from given the economy’s reliance on exports and a projected dive in global trade volumes. As for Spain, he wonders how a decline in output can be held to the Commission’s minus 0.2 percent with unemployment rising rapidly, industrial production tanking and construction and housing activity collapsing.