Euro-zone government bonds have not been made safe—and the euro project remains in peril

THERE were hopes, however faint, that Europe’s leaders might, in the space of a few days, manage to persuade investors that euro-area government bonds were safe assets, not toxic waste, thus putting paid to fears that the currency zone would disintegrate. The verdict, a week after meetings of the European Central Bank and European Union leaders on December 7th-9th, is that they failed.

The new measures that emerged from these meetings fell short of what is required to save the euro, though they may be enough to support the zone’s stricken banks and sovereigns for a while. The bond markets’ initial response is not encouraging. Yields on the ten-year bonds of Italy and Spain, the big euro-zone countries that investors are most wary of, have risen again after falling in the run-up to the summit.

The euro has also dropped to its lowest level (below $1.30) against the dollar since January. The likeliest trigger for the next stage in a deepening crisis is a downgrade of euro-zone government bonds, which would strip France and even Germany of their prized AAA credit rating.

The gatherings in Frankfurt and Brussels did not deliver the “comprehensive” solution to the euro’s ills that was billed, but optimists point to some modest progress. The ECB lowered its benchmark interest rate from 1.25% to 1%, the second quarter-point cut in as many months, to try to mitigate the coming recession. It agreed to provide unlimited cash to commercial banks for up to three years, at its main interest rate, to replace the medium-term funding that private investors are unwilling to extend. The central bank will now accept higher-risk asset-backed bonds as well as loans as security for cash, and it has lowered its reserve requirements for banks to ease their funding pressures.

The Economist December 2011

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Chinese consumers spend more again

Prime Minister Wen Jiabao said Beijing’s stimulus measures are helping consumer spending and growth, and while he warned of some “prolonged difficulties” as the financial crisis spreads, foreign auto makers and other manufacturers already are seeing an unexpected rebound in sales in China.

The resilience of Chinese spending contrasts with sharp cutbacks by American and European consumers, and may help China recover faster from the financial crisis.

A torrent of bank lending, spurred by the government, is increasing investment in China. Consumers are out shopping in response to incentives such as lower mortgage rates and tax cuts on car purchases.

Economic growth slowed to 6.1% in the first quarter, as retail sales, after adjusting for price changes, rose 15.9% for the period. While that was slower than the 17.7% rise in spending in the fourth quarter of last year, economists say the growth in consumption is encouraging given rising unemployment in the country and the contrast with shrinking consumption in other major economies.

Auto makers in particular are benefiting. Vehicle sales in China climbed 5% to a record 1.11 million units in March – a tentative turnaround from last autumn, when car sales slowed significantly.

Chinese consumers are spending, in part, because they have greater confidence in the government, rooted in three decades of rising economic growth. “The younger generation in China doesn’t have bad memories. We did the survey in Brazil where the real economy is OK, but people still have bad memories of economic upheaval. So even though the real economy there is not that bad, more folks are trading down,” said Carol Liao, partner and managing director at Boston Consulting’s Greater China office.

The Wall Street Journal April 2009

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Euro-Zone Inflation Stays High

The euro zone's inflation rate rose to its highest level for 28 months in February, driven by higher costs for fuels for transport, heating oil, electricity, and gas, official data showed Wednesday.

The data, while expected, are likely to heighten expectations the European Central Bank will soon raise its main interest rate from the record low of 1%, where it has been since May 2009.

The data show rising energy prices continue to push the inflation rate above the ECB's medium-term target of just below 2%. In February, energy prices rose 0.9% from the previous month and were 13.1% higher than in February last year, the sharpest annual gain since September 2008.

Underlying, or core, inflation—which excludes volatile items like energy, food, alcohol and tobacco—slowed to an annual rate of 1% in February from 1.1% the previous month.

Separately, Eurostat said wage growth in the euro zone picked up in the final three months of last year from its record-low pace, although pay still rose less rapidly than prices.

The figures once again highlighted the widening divergence between some larger members of the euro zone and the smaller economies that have been forced to seek outside help to fund their huge budget deficits.

So while wages grew by 2.7% in France and 1.4% in Germany, they fell by 5.5% in Greece and 1.3% in Ireland. As members of the euro zone, neither Greece nor Ireland are able to depreciate their currency to regain competitiveness, so both have had to resort to what are known as "internal devaluations," or wage cuts, in an effort to reduce their dependence on foreign capital.

The Wall Street Journal March 2011

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