As usual, the European Central Bank is bumbling along a little behind the knowledge curve. In the fi...
As usual, the European Central Bank is bumbling along a little behind the knowledge curve. In the first week of the new year it declined to raise its key rate, basking rather complacently in mere anecdotal evidence of a rapid pick-up in economic activity, and the comfort of the competitive level of the euro. Stubbornly high unemployment data provided cover for the monetary doves.
Now Q4 1999 indicators are already showing the ECB missed an opportunity for a pre-emptive strike. An unexpected rise in the French inflation figure last week might wake the policymakers from their slumbers. Business and consumer confidence surveys have revealed the bullish mood - the rise in corporate activity and a surge of new issues confirm the trend.
Euroland governments may squeak as they see their corporate flagships sold to foreigners but the trend is probably unstoppable.
If the Mannesmann/Vodafone Airtouch deal goes through, it will show investors still have some appetite for such corporate activity, and others will follow. On a global perspective (following AOL's merger with Time Warner) the current Euro action is but a hint of things to come.
Just a year ago policymakers in most industrial countries were slashing interest rates to forestall risks of a global downturn. Euro growth was tentatively proposed at 2% at best; now most projections are 3%-plus.
Long-term real rates are around historical levels in Germany but are low compared to region-wide averages of the past 10 years. The mixture of that, an undervalued euro and corporate restructuring has lifted credit expansion in Euroland to a double digit pace.
Rapid growth is becoming more evident in countries like Finland, Ireland, Portugal and Spain, where higher inflation rates imply lower than average real rates.
Even the laggards - Germany and Italy, are starting to recognise an upturn. Many strategists now see the ECB's central rate at not less than 4% by the end of 2000.
A series of gentle rate rises do little more than slow the rate of the overall rise in the equity markets. Fund managers acknowledge a new appetite for risk among investors everywhere, but most markedly in Europe.
Over half the money raised by the Italian fund management industry last year went into equity funds, rather than the usual route into bond funds. Even domestic equities lost out to international and even emerging market exposure.
The relatively new interest in equities is repeated across Europe and from this side of the Channel, is a welcome development, if only in that it suggests that if there is to be any convergence between the UK economic cycle and that of Euroland, it will be by Euroland catching up the UK.
UK investors, meanwhile, are not quite ready to accept the end of a bull market. Spending and house price data show last week's 25 basis point rise in the base rate to 5.75% by the Bank of England was well justified.
Indeed, it was widely expected and fully priced into the markets. Manufacturers and small businesses voiced their usual concern but most other players were rather surprised it wasn't more.
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