The ECB is fighting on two fronts at the moment. On the one hand it has a two-stream eurozone where ...
The ECB is fighting on two fronts at the moment. On the one hand it has a two-stream eurozone where countries like Ireland, Spain and Portugal are racing ahead, battling to keep inflation below the 2% target level, and for the most part not succeeding. Meanwhile economic indicators from core markets like Germany suggest recovery is still not well established, and could be snuffed out by heavy-handed monetary policy.
Give the choice between core and periphery, the ECB would look after the core every time. If the weak Ifo report had not been contradicted, high growth markets would have been told to look after their problems as best they could, probably by unofficial pressure to tighten credit, followed by some fiscal medicine.
On the other hand, there is the problem of the euro, which despite several rate rises in recent months and other measures of support, has continued an almost uninterrupted slide since launch. The currency touched lifetime lows against the yen just days before it sank through its previous low against the dollar.
It is not the ECB's primary job to support the euro, but it is undermining other policy initiatives and even defenders are running out of excuses for its persistent weakness. At first it was because it was not properly established; then it was because European economic fundamentals were not robust enough to lend a hand. When growth picked up and stock markets flourished, the currency still flopped. Now the explanation is the lopsided capital account between Europe and the US.
It is true European companies have been on a spending spree in North America. Year to date, there has been $170bn of M&A deals from European firms reaching across the Atlantic and a rather thin $25bn going the other way. Cheap European paper is being used to buy quality US assets, which, in theory, are then buying in Europe.
Or are they? Anecdotal evidence suggests US companies are not as keen on European acquisitions as Europeans would like them to be. In fact, they consider European stocks expensive and burdened with work-shy, amateurish management, equipped with antiquated technology. European managers take holidays and have a family life; they cannot be serious entrepreneurs.
In any case, the European M&A binge, led by the big telecoms companies, is about to end. Both Deutsche Telekom and BT have announced that their acquisition programmes are over. Indeed, the markets are likely to suffer a deluge of spin-offs being dumped as finance directors struggle to amass some cash to pay for what they have ordered.
But who is buying continental Europe now? In contrast to the hopeful sentiment earlier this year, the region is now looking off-colour compared with some of the blooming opportunities available in Japan, for example, or even Asia. Stagflation the dreaded combination of low growth and high inflation is in the air. Longer term, the story is still good, provided corporate restructuring comes through. But in the short term, there is no place like home.
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