Euro's stability at stake in global economy

More Neil Staines, 5 days ago05 December 2011

“A politician needs the ability to foretell what is going to happen tomorrow, next week, next month and next year. And to have the ability afterwards to explain why it didn’t happen.” – Winston Churchill. 

Past
In the US on Friday the all-important employment report gave reason to reassess the current situation. It has long been assumed that the labour force in the US grows at around 200k per month. Therefore in order for the unemployment rate to remain stable it has been assumed that payrolls need to grow at around 200k per month. Empirical data shows, however, that the labour force has now been effectively unchanged for two years and while some of this can be put down to the recession it has clear and not insignificant implications for the US employment rate and thus the assumptions of monetary policy. Namely the important point is that if the assumption of a steadily growing labour force is not correct (or if the rate of increase is now lower) then the pace of growth that is required to lower the unemployment rate, or ultimately the pace of growth that is required to tighten monetary policy is thus lower. 

I would suggest that the reality of the situation, however, is somewhere inbetween the zero and 200k expansion of the labour force but the implications for US monetary policy remain. Whilst the report is not a boost to the prospects for global growth in the near term, ultimately the report is positive for the US and the USD. 

Present
Some positive data out of Australia and the suggestion from a well respected commentator, that the Reserve Bank of Australia will leave rates on hold tomorrow (a 25bp cut had been fully priced in until this point – though it is still broadly expected by the market). However, the AUD is still at the mercy of the broader risk appetite of markets and in the current environment the broader risk appetitre will continue to be driven by the Eurozone – the biggest downside risk to the global economy. Comments this morning from rating agency Fitch that the “exposure of Chinese banks to the property market is understated” may weigh heavily on the AUD going forward however, their suggestions that this may play a part in leading them to cut the Reserve Requirement Ratio further may counter the near-term bearishness. 

Future
This week starts with the announcement of new austerity measures from Italy’s technocratic government. The EUR20 billion package was announced after a cabinet meeting yesterday, inclusive of a wealth tax along with higher income tax and retirement age measures. Whilst this was met with a positive bias by the markets on the open, the impact is likely to fade. Italy’s public debt stands at around EUR1.8 trillion (or 120%) of GDP, whilst austerity is welcomed and indeed necessary to correct the fiscal imbalances of the Eurozone, measures of austerity alone will not create enough of an impact on public finances to calm fears and re-engage sovereign bond buyers for a significantly long period, during which the impact of austerity on growth will continue to weigh heavily. 

In this regard the EU Summit starting today will be the core focus and concern of early position takers. Amid the headlines of ‘treaty change’ and calls for ‘more Europe, not less’ it is likely that, lead by Merkel and Sarkozy, the summit points the Eurozone towards Fiscal Union. It does however seem that the greater step, of Euroepan Central Bank financial monetisation seems one step too far for the Germans at this stage, and whilst greater Fiscal co-ordination and regulation of states is a positive for the long run, it does little to address the current issues. Headlines from this evening's meeting however will be very closely watched. 

“This week the stable future of the euro and thus economic recovery in Europe and employment are at stake.” – EU Economic and Monetary affairs commissioner, Ollie Rehn.

Tags: EURUSD, GBPUSD, EURGBP, macro, Gross Domestic Product, Unemployment Rate 117 Views 0 Like! 0 Comments 0 Follow In order to like something, you need to be a member.
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