Europe needs a weak currency

Updated 07 November 2012
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Europe needs a weak currency

LONDON: While the world is transfixed by the outcome of the US elections, the euro zone is busily imploding economically.
And this time the difficulty isn’t so much being driven by the troubles in Greece, Spain and elsewhere but is reflecting a stark underlying weakness which will complicate already thorny structural problems. Recent data on bank lending — still central to the European economy — shows an old-fashioned, flat-out recession deepening, with banks and borrowers both backing away from credit as quickly as their little legs will carry them.
The situation cries out for action to weaken the euro from the European Central Bank, which is widely expected to do exactly nothing at its policy meeting tomorrow. Perhaps the only good news is that the markets, recognizing the issues, are trading the value of the euro lower, making some slight difference in competitiveness and external demand.
Data released recently shows euro zone manufacturing shrinking for the 16th month in a row, but the real horror show recently was in an ECB survey of bank loan officers. Compared to the second quarter, loan conditions were 15 percent tighter in July-August, with banks charging more, demanding more collateral and being especially tough on riskier loans.
While banks mostly blamed the dismal outlook for their signal unwillingness to lend, lending conditions were also made worse by how expensive bank capital has become. Few want to commit capital to banks, but bank regulators are demanding more capital. This is probably wise, but the upshot is a real credit crunch. And the outlook, bankers say, is for more of the same between now and the end of the year.
We are probably hearing less about this than we otherwise would because companies themselves are not keen to borrow, seeing less profit in making new investment and being wary of extending themselves going into what may be a multi-year recession. A separate survey of small and medium-sized companies showed they are finding it increasingly difficult to get loans, with 18 percent calling access to financing their main problem.
Compared to the year before, the amount of loans made to the private sector in September shrank by 1.3 percent, with loans to corporations shrinking at double the rate in that month compared to August.
It is hard to overstate just how bad these numbers are. The euro zone economy relies heavily on bank loans, but its banking system is both unwilling and largely unable to provide finance.
Even if financing were cheap and easy, businesses have little motivation to take it up.
In pledging in late July to provide whatever was needed to support the euro, ECB chief Mario Draghi vastly reduced the risk of break-up, but didn’t do enough, in reality, to improve conditions on the ground. In actuality, Draghi’s pledge helped to underwrite a sharp rise in the value of the euro, the last thing the economy of the currency zone needs. Even after recent falls, the euro is still about 6.5 percent stronger against the dollar than its July lows. Further falls would be welcome, but the ECB may prove reluctant to jawbone its currency lower, fearing that it looks weak and overly pliant in the process.
The problem for the ECB is that, having stepped rather far out on a limb in supporting the euro project, it could easily find itself waiting too long for institutional solutions to fast-moving economic deterioration. Just this week we will have two key votes in Greece on austerity measures, and it is already manifest that Greece will need some combination of extra time, money and reduced debt. At the same time, the central bank faces questions, most recently raised in German media, over how rigorously it is applying its own rules over collateral presented to it by Spanish banks for loans. All of this may make it difficult for the ECB to feel it can safely take extra steps to support growth.
Almost throughout the crisis the ECB has erred in being too hawkish, fighting the phantom of inflation while structural and debt problems sent waves of deflation through the euro zone economy and out into the world. And to be sure, on the currency front the ECB’s job has been made more difficult by the fact that both the Federal Reserve and Bank of Japan have moved in recent months to expand or extend bond-buying programs.
If the ECB takes this Thursday’s press conference as an opportunity to spell out when and how it will implement its new bond purchase program, a perverse impact could actually be to drive the euro higher even while it lowers financing costs for euro zone sovereigns.
Getting real-world interest rates to fall, improving the transmission of monetary policy, may not be enough. The ECB needs to heat up its side of the global currency war.
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— James Saft is a Reuters columnist. The opinions expressed are his own.


World Cup football fakes keep Dubai’s ‘Dolce & Karama’ traders busy

Updated 2 min 40 sec ago
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World Cup football fakes keep Dubai’s ‘Dolce & Karama’ traders busy

  • Dubai's “Dolce and Karama” is the emirate's copycat capital
  • Neymar Jr shirts are proving especially popular with local shoppers

DUBAI: Tucked away in an old residential district and far from Dubai’s glitzy air-conditioned malls, the Karama area of the city is doing a roaring trade in selling World Cup football shirts.

But if you’re looking for the genuine article, you may have come to the wrong place.

Karama is Dubai's copycat capital where the knockoff imitations of the world's most famous fashion brands are sold for a fraction of the genuine price.

Known to some locals jokingly by the epithet “Dolce and Karama,” a play on the Dolce & Gabbana Italian fashion house, this is a place where if you have to ask the price, you probably can afford it.

With three weeks to go until football’s new world champions are crowned, the world’s biggest sporting tournament is keeping the tills chiming on the street that has become notorious for selling everything from fake Luis Vuitton bags to knockoff Ray-Ban sunglasses.

However since the tournament kicked off just over a week ago, it’s been football not fashion, that has put a smile on the face of traders.

Retailing for a fraction of their high-street cost, the copycat shirts — especially those bearing the name of Brazilian superstar Neymar — are flying off the stalls less than week into the tournament, as UAE-based fans who want to don the colors of their favorite team or player, look for bargains.

Mohammad Ashraf has been trading in Dubai’s Karama Shopping Complex for 15 years.

At his store, Mina Fashion, Ashraf said the World Cup has brought a booming trade.

When asked how many shirts he would sell prior to the Fifa World Cup, he shrugged.

“Maybe one, two — maximum five a day,” he said.

But the Indian trader has quadrupled his business since last week’s kick-off.

“Now, we have been very busy,” he said. “We sell at least 20 pieces a day — maybe more,” he said.

His football shirts are a fraction of the cost of the genuine article on sale in Dubai malls where retailers are feeling the pressure from the growth of online rivals, the introduction of VAT and the strong dollar to which the UAE dirham is pegged — that is hitting tourist spending hard.

Karama football shirts sell for about 65 dirhams ($18) in adult size and 55 dirhams for children. But the real deal costs three or four times as much a few miles down the road in the Dubai Mall, the city’s biggest tourist draw.

In Karama, the football shirts of the Brazil, Argentina and Germany teams have been among the biggest sellers.

And the most popular player?

Ashraf said shirts bearing the name of Brazilian footballer Neymar da Sila Santos Junior have been flying off the shelves.

Abdulla Javid, runs Nujoom Al Maleb in the Karama shopping district — a shop selling a variety of knock-off sportswear — including World Cup shirts for men, youths and children.

“They are not real, not branded — branded ones are very expensive,” he said.

“We have shirts for Germany, for Argentina, for Portugal, for Sweden, for Brazil and for Belgium,” he said, pointing to racks of multi-colored football shirts.

Mens shirts retail for about 45 dirhams for adult sizes in his shop and 40 dirhams for youths. For young children, he sells shirts and shorts for a combined price of 30 dirhams.

The World Cup has also been a welcome boom for business.

“Before we sell maybe between five to 10 (shirts) a day,” he said. “Now, at least 20 to 30 pieces a day. It has been very busy. This time is a good time for us.”

Also at Karama Shopping Complex is Zico Sports.

Ahmed Jaber, a 53-year-old trader, said there are good deals to be found in at the shop he has worked in since the 1980s.

He sells football shirts that are both “branded” and “non-branded” — in other words the genuine article and cheaper knock-offs.

He said customers have been happy to shell out for the genuine football shirts for the adult sizes — which he sells for 379 dirhams, but for children, shoppers prefer to buy the fake football shirts, which he sells for about 30 dirhams.

The most popular shirts since the start of World Cup have been for Brazil, Argentina and France, he said, but his shops have an abundance of kit for all competing countries.

When he asked how the 2018 World Cup had been for business, he laughed.

“Not bad at all!,” he said.