Tuesday 9th February 2016
NEWS TICKER: KPMG has appointed Adrian Stone as its UK head of audit with immediate effect, succeeding Tony Cates who now leads KPMG's international markets and government practice. Stone joined KPMG's Sheffield office in 1984 and has been an audit partner since 1997. He previously held several senior roles in KPMG's audit practice including head of audit for the north of England and Scotland, chief operating officer for the UK audit practice, head of internal audit and head of KPMG's department of professional practice. He has been KPMG's interim head of audit since November last year - Bridge Bank says it has provided faith based Spark Networks with a $10m revolving credit facility - BNP Paribas Securities Services has been appointed by Sampo Group, the Finnish financial services group, to provide global custody and settlement services for Sampo’s €25bn of insurance assets held globally - Saudi Arabia is reportedly reconsidering the requirement for foreign companies setting up in the country to have a local partner. A committee led by the Saudi Arabian General Investment Authority, the Ministry of Commerce and Industry and the Ministry of Labour, will look at ways to spur additional inward investment into the realm, according to newspaper Asharq Al Awsat. The committee is expected to ease the bureaucratic barriers for foreign firms that want access to the Saudi Arabian economy. Foreign direct investment is vital as the kingdom looks to make up foreign exchange losses and balance its $98bn budget deficit – European president Donald Tusk met with Georgian premier Giorgi Kvirikashvili today. Discussion focused on continued reforms of the Georgian judiciary, rule of law and human rights are important priorities and I underlined the EU's readiness to assist. It is crucial that criminal investigations and prosecutions be evidence-based, transparent and impartial, in line with the commitments of the Association Agreement. “I share Georgia's concerns about the continued implementation of the so-called “treaties" between Russia and Abkhazia and South Ossetia. I saw for myself the situation at the administrative boundary line, including the "borderisation" [sic] process, during my last visit to Georgia,” said Tusk following the meeting. The European Union will continue to give its firm support for the territorial integrity of Georgia within its internationally recognised borders.” - February 9th 2016: The Polish Financial Supervision Authority (KNF) at its meeting today confirmed the appointment of Małgorzata Zaleska as President of the Management Board of the Warsaw Stock Exchange, following her appointment as president on January 12th. Zaleska is the director of the Institute of Banking, Warsaw School of Economics; the Chairperson of the Committee of Finance Sciences of the Polish Academy of Sciences; a member of the NBP Economic Research Committee; a member of the Central Commission for Degrees in Finance – Today’s equity markets tell a tale of fears of a global slowdown with even the US considered a candidate for recession. The US session yesterday was not pretty, with the S&P500 down 1.42%. The index has lost around 9% of its value this year and is now 13% below the nominal high that it reached last year. The DJIA was down 1.1% and Nasdaq100 fell 1.59%. The Nasdaq100 is now 17.92% below the nominal high that it reached last year. Swissquote says: “The sentiment is risk-off at the moment, with gold reaching $1,200 for the first time since June. Gold’s bullish momentum continues yet commodity linked currencies such as the AUD and NZD failed to gain the advantage as outside precious metals and other commodities broadly fell. In particular, WTI Crude is now back around below $30 a barrel over continued oversupply concerns. Markets are now fearing that this period of lingering low oil prices could last a long time”. – In the Asian session Japanese stocks fell more than 5% and the yield on the benchmark government bond dropped into negative territory for the first time. The decision by the Bank of Japan to introduce negative interest rates looks to have pushed down yields for both short and longer termed bonds. In afternoon trading in the Asian session, the benchmark 10-year government bond was yielding minus 0.025; in other words, investors were willing to lend the over-indebted Japanese government money for 10 years and get back less than they put in. Remember that Japanese sovereign debt is more than double the country’s GDP. The question is now, how far down can yields go? Moreover, when will central banks stop flirting with negative interest rates. It is a dangerous policy. The stock market took the brunt of investor fears today, as the Nikkei Stock Average closed y down 5.4%, falling 918.86 points to finish at 16,085.44. This is a sizeable drop and the largest one-day fall for about two and a half years. Yet again, the yen did well, rising against the US dollar to 114.80. Financial shares took the brunt of today’s pain with Mitsubishi UFJ Financial Group Inc. (MTU) shares closing down 8.7%, and Nomura Holdings losing 9.1%. Australia's S&P/ASX 200 ended the session 2.9% lower, and New Zealand's S&P/NZX 50 was down 1.3%. India's Sensex was 1.2% lower. Chinese, Singapore and Korean markets are closed today. In Europe, equity futures are mixed. The CAC40 has dropped 0.22%, the DAX is down 0.21% while the FTSE100 is unchanged, but there’s still half a day’s trading to go.

Latest Video

Blog

The European Review

By Patrick Artus, chief economist at Natixis

What kind of economy would the euro zone be without Germany?

Thursday, 28 June 2012 Written by 
What kind of economy would the euro zone be without Germany? There is increasing talk about establishing federalist mechanisms (eurobonds, eurobills) and pooling certain risks and investments between euro-zone countries (European bank guarantees, recapitalisation of banks by the EFSF-ESM, increased investments by the EIB, EFSF-ESM access to ECB funding, purchases of government bonds by the ECB). Germany's criticism of these proposals is that they ultimately place all the costs and all the risks on Germany, due to its economic, fiscal and financial situation and its credibility in financial markets. It is claimed that eventually all the bills will be sent to Germany, since the other euro area countries have no fiscal or financial leeway or any credibility to guarantee deposits and loans. We shall therefore examine the economy of the euro zone excluding Germany and ask the question: Is it in such a bad situation that federalism or the pooling of risks and investments between euro-zone countries would in fact amount to potentially placing the entire burden on Germany? We think that Germany’s fears are justified. http://www.ftseglobalmarkets.com/

There is increasing talk about establishing federalist mechanisms (eurobonds, eurobills) and pooling certain risks and investments between euro-zone countries (European bank guarantees, recapitalisation of banks by the EFSF-ESM, increased investments by the EIB, EFSF-ESM access to ECB funding, purchases of government bonds by the ECB). Germany's criticism of these proposals is that they ultimately place all the costs and all the risks on Germany, due to its economic, fiscal and financial situation and its credibility in financial markets. It is claimed that eventually all the bills will be sent to Germany, since the other euro area countries have no fiscal or financial leeway or any credibility to guarantee deposits and loans.

We shall therefore examine the economy of the euro zone excluding Germany and ask the question: Is it in such a bad situation that federalism or the pooling of risks and investments between euro-zone countries would in fact amount to potentially placing the entire burden on Germany?

We think that Germany’s fears are justified.

Federalism: pooling between euro-zone countries

The resolution of the euro-zone crisis will inevitably involve establishing certain forms of federalism (eurobonds, eurobills) and the pooling of certain investments and risks (a European bank guarantee system, the recapitalisation of the banks (e.g. Spanish banks) by the EFSF-ESM, an increase in structural funds or investments by the EIB, ESM access to ECB funding).



The pooling of risks between euro-zone countries already exists: the Target 2 accounts are a pooling of bank risks among euro-zone central banks, and purchases of government bonds by the ECB pool sovereign risk.

This trend to federalism and pooling is inevitable: in a monetary union without federalism, countries with external surpluses and countries with external deficits cannot coexist permanently due to the resulting accumulation of external debt.

A number of financing needs are too substantial to be borne by a single country, e.g. for Spain the need for recapitalisation of its banks. And a number of risks (e.g. the risk of a bank run) are also too great not to be pooled.

Is this move towards federalism and pooling a trap for Germany?

The view in Germany is clearly that this move towards federalism and pooling is a trap for Germany. It is claimed that Germany will have to cover most of the costs because it has public finances in good health, growth that is now stronger, higher living standards than the countries in distress, and excess savings.

Germany also has strong credibility in financial markets, as shown by its interest rate level, and it is the only country to be able to credibly insure risks and guarantee loans.

The Germans' concern is therefore understandable: if there is federalism and a pooling of investments and risks, will Germany "receive all the bills"?

To determine whether this is a real risk, let’s examine the situation of the euro zone without Germany: is it such a worrying region, will it have to be propped up permanently by Germany?

The economic and financial situation of the euro zone without Germany: Is it serious?

Without going into greater detail for each country, we shall examine:

·                   its competitiveness, the foreign trade situation; the weight of industry;

·                   its situation regarding its technological level, skills, productivity and investment; its potential growth;

·                   the situation of its businesses and households;

·                   its public finances.

1. Foreign trade, competitiveness, weight of industry

The euro zone without Germany has:

·                   a structural external deficit;

·                   a shortfall in competitiveness;

·                   a small industrial base;

·                   a large external debt.

2. Technological level, skills, investment, productivity and potential growth, capacity for job creation

The technological level of the euro zone without Germany is fairly low, as is the population's level of education; this zone invests little, has low productivity gains, and since 2008 it has destroyed jobs massively.

3. Situation of businesses and households

Corporate profitability in the euro zone excluding Germany is low, but private (corporate and household) debt is lower than in Germany; however, household solvency has deteriorated (in Germany, household defaults are low and stable; in France, Spain and Italy, they are high and rising).

4. Public finance situation

The public finances of the euro zone excluding Germany are in a very poor state compared with Germany. Indeed Germany’s debt to GDP ratio is expected to fall, while in the euro zone excluding Germany it should rise rapidly toward 100%; Germany has a 1% primary surplus, while the euro zone excluding Germany has a 2% primary deficit.

Conclusion: Are the German fears justified?

If the euro zone were to become a federal monetary union, with solidarity between countries and pooling of certain investments (recapitalisation of banks, for example) and risks, surely the rest of the euro zone excluding Germany could only be:

·                   benefiting from transfers from Germany;

·                   benefiting from Germany's credibility in the markets;

·                   benefiting from Germany's guarantee;

Or could it share this burden with Germany? We suspect that the burden on Germany would be very heavy.

Patrick Artus

A graduate of Ecole Polytechnique, of Ecole Nationale de la Statistique et de l'Adminstration Economique and of Institut d'Etudes Politiques de Paris, Patrick Artus is today the Chief Economist at Natixis. He began his career in 1975 where his work included economic forecasting and modelisation. He then worked at the Economics Department of the OECD (1980), before becoming Head of Research at the ENSAE. Thereafter, Patrick taught seminars on research at Paris Dauphine (1982) and was Professor at a number of Universities (including Dauphine, ENSAE, Centre des Hautes Etudes de l'Armement, Ecole Nationale des Ponts et Chaussées and HEC Lausanne).

Patrick is now Professor of Economics at University Paris I Panthéon-Sorbonne. He combines these responsibilities with his research work at Natixis. Patrick was awarded "Best Economist of the year 1996" by the "Nouvel Economiste", and today is a member of the council of economic advisors to the French Prime Minister. He is also a board member at Total and Ipsos.

Website: cib.natixis.com/research/economic.aspx

Related News

Related Articles

Related Blogs

Related Videos

Current Issue