The problem of the strong euro is caused by the weakness of the pound and the dollar. It is not a vote of confidence in the eurozone, which is forecast to have a very dodgy 2010. If that happens where will the money go? There is effectively no other ‘port-in-a-storm’ - ,nothing else for the dollar or pound to fall against!
There are some that say the eurozone is a ‘closed loop’ economy but they are wrong! Germany’s domestic market is very weak, Germany is an exporting nation. As for France just think of their nuclear industry, their wine and spirit trade, their couture and perfumery, and Airbus in its fight with Boeing. As for the Irish this would be the last straw.
Separately the Telegraph prints an article which I casn’t find online entitled “Britain blocks EU move to take charge” (Some good news and they bury it! Grrr! )
However, it seems we still have the power to say ‘NO’ to something and this is Darling digging in his toes to resist the establishment of a European super Regulator which could override national supervisors and instruct national banks in their actions. “The proposals would allow Europe to start dictating an element of Britain’s spending and budgetary policy. ” That’s the core of it but there are more details on page B3.
Then Damien Reece takes the banking dilemma and King’s reaction a stage further.
Meanwhile the public continues to fiddle with trivia while The City burns.
Christina
TELEGRAPH 21.9.09
1. Euro at $1.50 is 'disaster' for Europe
France has given its clearest indication to date that the surging euro is a threat to Europe's fragile recovery and will not be tolerated for much longer.
By Ambrose Evans-Pritchard
"The euro at $1.50 is a disaster for the European economy and industry," said Henri Guaino, right-hand man of President Nicolas Sarkozy. [It was $1.494 yesterday -cs]
The currency has risen 15pc in trade-weighted terms since March, equivalent to six quarter of a percentage-point rises in interest rates. It briefly flirted with $1.50 against the dollar on Tuesday before falling back on intervention fears.
What concerns European policymakers most is the lockstep rise against China's yuan. Beijing has clamped the yuan firmly to the weak dollar for over a year, quietly benefiting from the export advantages. It accumulated $68bn (£41bn) in reserves in September alone as a side-effect of holding down the currency. Fresh reserves are mostly being invested in eurozone bonds, pushing the euro higher.
French finance minister Christine Lagarde said it was intolerable that Europe should "pay the price" for a dysfunctional link between the US and China. "We want a strong dollar, and we have reiterated it again in the strongest manner," she said after this week's Eurogroup meeting. China's trade surplus with the EU reached €169bn (£154bn) last year.
Europe and Japan are now the last two blocs standing as everybody else lets their currencies fall, or takes active measures to hold down the exchange rate -- with "beggar-thy-neighbour" echoes of the 1930s.
Brazil has become the latest country to intervene, resorting to controls to cap the real after its 42pc rise against the dollar since March. It is imposing a 2pc tax on flows into bond and equity markets. Finance minister Guido Mantega said the move was to head off an asset bubble. Critics called it a "desperate move" that would distort markets.
Hans Redeker, currency chief at BNP Paribas, said the strong real is "eating away" at Brazil's manufacturing base. "They are not willing to take any more of the adjustment burden as long as China and other surplus countries do nothing," he said.
Switzerland is openly intervening to hold down the franc in order to stave off deflation. Canada and New Zealand have talked down their currencies. Britain and Sweden have opted for stealth devaluations.
Korea, Thailand, Taiwan, the Philippines, Indonesia and Russia have all been buying dollars to stem their currencies' rises. The effect is to perpetuate the imbalances that led to the credit bubble from 2004-2007 and ultimately caused the financial crisis. Reserve accumulation fuels asset booms because it creates a wash of liquidity and drives down global bond yields. Asia clearly needs to sharply revalue against the West to right the system.
Professor Michel Aglietta from Paris University says the euro is 40pc above its purchasing parity of level $1.07 (a low estimate), citing it as the reason why Peugeot and Renault have shifted annual production of one million cars to Eastern Europe since 2004.
Airbus is moving plants offshore, building A320 jets in China. It is relying heavily on US contractors for its A350 jet. Fabrice Bregier, Airbus chief financial officer, said the current exchange rate is "becoming very difficult for all industrial companies which have their costs in euros. We can only appeal to monetary authorities to see to it that there is stability in exchange rates."
The European Central Bank could take some of the steam out of the euro by signalling a less hawkish policy. It may be pressured into doing so. EU ministers have the final say on exchange rate under Maastricht, though they have never used this power – publicly.
What is missing is a unified front of EU governments. Italy has been remarkably quiescent, given its export slide. Germany has a higher pain threshold for a strong currency after gaining competitiveness by squeezing wages. But there are limits even in Berlin. The IWK institute says the danger point for German exporters is $1.45.
Jean-Claude Trichet, ECB president, has stepped up his rhetoric against "disorderly" currency moves, warning that authorities on "both sides of the Atlantic" were monitoring the markets. He made an unscheduled appearance on Monday to drive home the point. The body language is changing.
2. As Credit Crunch II looms, we must learn to escape risk of moral hazard
For all those people belly aching about bank bonuses and dodgy mortgage lending in recent days, a speech by the Governor of the Bank of England addressing reform of the banking system ought to have been a highlight of the week.
By Damian Reece
But as Mervyn King told his Scottish business audience last night: "If our response to the crisis focuses only on the symptoms rather than the underlying causes of the crisis, then we shall bequeath to future generations a serious risk of another crisis even worse than the one we have experienced."
This is no empty threat. At the heart of the boom last time round was a belief that the notion of risk had fundamentally changed. Banks and other financial institutions invented whizzo ways to borrow and lend ever larger amounts but at the heart of the system was the principle that central banks, including ours, would be lenders of last resort.
This implicit support, or guarantee, meant creditors were happy to supply ever larger amounts of cheap funding to bankers to lend and grow their assets.
This so-called moral hazard of central banks underwriting risk, transferring banking losses onto taxpayers, was interrupted briefly with the bankruptcy of Lehman Brothers. But it has started all over again and we are witnessing a second cheap money bubble forming in front of our faces. Deflating it is going to be a lot more difficult than if we'd tackled the first one properly.
This second bubble is revealing itself through many familiar symptoms: soaring equity markets divorced from economic fundamentals, billions being stashed for bankers' bonuses, interest rate spreads on debt, such as corporate bonds, narrowing fast and even residential and commercial property markets showing signs of recovery.
The cause is fundamentally the same – taxpayer-funded support for banking. All that's happened is that the support has gone from implicit to explicit, support which King last night described as "breathtaking".
In the UK he reckons it's not far short of £1 trillion. But despite these sums, nothing has changed in the way banks are organised to avoid a repeat of the moral hazard problem.
"The massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history," said King last night. If you thought Credit Crunch I was bad, Credit Crunch II is going to be, well, breathtaking.
Moral hazard first time around incubated a financial ooze that created cheap money.
Exporting countries such as China lent their huge surpluses to importing, consumer hungry deficit countries such as the US. An "inadequately designed regulatory system", according to King, made things worse.
Righting these imbalances is possible [though not happening - see first article above -cs] through economic and policy coordination amongst leading nations but regulatory reform of the banking system is still stalling.
King made it clear in his speech that he favours a separation of banking activities between "utility" functions that you and I rely on, and that might still be backed by a lender of last resort, and other activities such as investment banking where the risks of failure should lie squarely with creditors and shareholders.
Such a separation makes sense, is entirely practical and is the sort of root and branch change that needs to come about if we are ever to escape our problem of moral hazard. Will it mean more volatility because more banks could fail?
Possibly but then more banks would be properly run, with shareholders and creditors fully engaged and alive to risk rather than delegating their responsibilities to bodies such as the Financial Services Authority.
However much capital you force investment banks to carry and however much red tape you try to bind them in, a lender of last resort still cradling ultimate risk will insulate banks from reality. "The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion," King told his audience.
But while his message was suitably stark he didn't attempt to answer the other outstanding question burning away with an increasingly short fuse. Split banks by all means, but how do we unwind the £1 trillion of bank support already out there? [eg and as an example -how to divide Barclays share between Barclays retail and Barclays Capital (investment) -cs]
Quantitative easing, boosting the money supply through banks, must end some time.
So too must the Bank of England's Special Liquidity Scheme and medium term loan guarantee scheme, not to mention repayment of the Government's stakes in Royal Bank of Scotland and Lloyds Banking Group.
Oh, and we must not forget the asset protection scheme for toxic debt too.
An orderly retreat is needed and soon, otherwise we may never escape the danger of moral hazard. [But in “Darling proposes mutual suicide pact with electors” you can see that Darling doesn’t see that risk -cs]
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