Europe needs a weak currency



James Saft

Published — Wednesday 7 November 2012

Last update 7 November 2012 7:03 am

| نسخة PDF Print News | A A

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.
­
— James Saft is a Reuters columnist. The opinions expressed are his own.

What's happening around Saudi Arabia

RIYADH: In a fresh boost for relations between Saudi Arabia and Bangladesh, the Kingdom has decided to sign a memorandum of understanding on Foreign Office Consultations (FOC) with Dhaka. The Kingdom endorsed a proposal in this regard at a meeting be...
The Indonesian mission is hopeful detained Indonesian pilgrims will be free “very soon.” The mission is trying to persuade Saudi authorities of their nationals’ innocence.Eleven Indonesian pilgrims, who arrived in the holy city of Makkah to perform U...
JEDDAH: Police at King Khaled International Airport in Riyadh arrested a Saudi hacker after a government organization in Al-Leith in Makkah complained that he had hacked its website, according to an online newspaper.Col. Atti Al-Qurashi, spokesman fo...
JEDDAH: The special criminal court has sentenced a former military official to nine years in jail for joining Daesh and traveling to Syria to fight.A fine of SR5,000 was also slapped on him and he was barred from traveling abroad for nine years after...
JEDDAH: Saudi-Indian ties have reached a new high with the arrival of an Indian Air Force (IAF) flying contingent at the King Fahd Air Base in Taif.The mission, comprising more than 100 high-ranking IAF officers and airmen onboard Sukhoi MKI fighter...
RIYADH: A tripartite agreement among the National Handicraft Program, Prisons Department and the Technical and Vocational Training Corp. (TVTC) was recently signed in the presence of Prince Sultan bin Salman, president of the Saudi Commission for Tou...
JEDDAH: British authorities have opened investigations into the plane crash that led to the death of three members of the Binladin family.Investigations depend on the black box which registers the entire plane’s data, including speed, position of mob...
JAZAN: In a tragic accident, a speeding fuel truck caused four deaths and injuries to many people when it collided head on with five cars on the northern entrance of Abu Areesh area of Jazan, according to a website.The truck deviated from its path an...
JEDDAH: Municipal and Rural Affairs Minister Abdul Lateef Al-Asheikh has directed all the municipal authorities to closely scrutinize the election candidates’ credentials to thwart violation of rules.This is to ensure that the candidates meet all the...
Mohammed Mokammel Hossain, labor consul, Bangladesh Consulate, Jeddah * Which particular aspect of Saudi Arabia you like the most? Two Holy Mosques in Makkah and Madinah.* Can you tell us your favorite and oft-repeated Arabic word? Insha’Allah. * W...
RIYADH: Expatriates feel Saudi Arabia is a safer place than their home countries despite the fact that the Kingdom is leading a war against the Yemeni rebels and other terror organizations and a couple of suicide attacks in the recent past. Mahmoud T...
RIYADH: The maximum medical policy or contract for visitors is SR100,000, which covers expenses on emergency treatment, maternity charges, traffic accident injuries, dialysis and medical treatment in or outside the Kingdom. Making the above announce...
JEDDAH: The city and its surrounding areas sweltered on Monday, with the maximum temperature rising to 44 degree Celsius and relative humidity being recorded at 85 percent. The weather department has forecast a similar situation in Jeddah on Tuesday....
JEDDAH: A National Academy for Energy in Dammam and a private technical technical college, both exclusively for women, will be opened in the Easter Province.The General Organization of Technical and Vocational Training is in the process of implementi...
AL-AHSA: Masjid Joatha or Joatha Mosque is a center of attraction in Al-Ahsa with many visitors and tourists thronging the place of worship, which was believed to have been built in the seventh year of Hijri (629 AD).The mosque has been restored as p...

Stay Connected

Facebook