From Matthew Partridge, across the river from the City
If you’re a saver you’re probably sick of Mark Carney.
One day he’s hinting that rates will rise soon. A few days later, he’s arguing that it won’t happen until far into the future.
No wonder one MP once described him as an ‘unreliable boyfriend’ – always blowing hot and cold.
But compared to Mario Draghi, the head of the European Central Bank (ECB), Carney is a model of clarity and commitment.
‘Don Giovanni’ Draghi keeps seducing markets with the promise that he’ll take drastic action to save the euro and end the recession – but he never delivers.
So what will it take to get him to honour his famous ‘whatever it takes’ promise?
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The eurozone is still in a mess
Mario Draghi might have seen last week’s eurozone GDP figures as another decent excuse to delay quantitative easing (QE – money printing).
The euro area’s GDP grew by 0.2% in the third quarter. The data for summer was also revised upwards slightly. France and Spain were the big winners, although Greece’s GDP has also now been growing for three consecutive quarters.
But even these figures are still pretty dire – just 0.8% growth in annual terms. And individual countries are in much worse states: Italy’s GDP shrunk by 0.1%, Austria was flat, and Germany grew by a negligible
“Growth is still nowhere near strong enough to eat into the vast amount of spare capacity in the region”, reckons Jonathan Loynes of Capital Economics. In other words, you’re not going to get people back to work and factories working at full blast anywhere in the near future with growth like that.
Perhaps more pertinently for the ECB, that means there is still a good chance of “a prolonged and damaging bout of deflation”.
And the latest survey data suggests things might get worse. Growth in business activity slowed in November, while consumer confidence across the eurozone is down, which doesn’t bode well for spending.
Politics have to trump economics, for the sake of the European project
The other problem with low growth is that it makes it far harder for governments to balance their books. This is increasing political tension between nations in Europe.
Last month both France and Italy were forced to back down from a threat to ignore the eurozone guidelines and to allow their budget deficits rise in order to boost growth through higher public spending.
German leader Angela Merkel really doesn’t want to see the big nations breaking the rules (rather than merely bending them), because other countries will want to do the same. And that will leave already irked German voters feeling even more like they are propping up a bunch of free loaders.
The trouble is, both France and Italy already rely on a mix of statistical sleight of hand and optimistic forecasting to stay within the rules. For example, France is assuming that its borrowing costs will fall further, and that a crackdown on tax dodgers will raise significant sums of money, says The Economist.
But borrowing costs are already at rock bottom. And tax evasion – as most governments have found out in recent years – is not easy to eradicate, nor as widespread as most of them seem to assume (at least, judging by the sums raised by crackdowns in other countries).
So this is the equivalent of trying to pay the mortgage with coins that have fallen down the back of the sofa, and future winnings on the National Lottery.
If this plan fails, as it almost certainly will under present conditions, then both the French and Italian governments could find themselves forced to make some real spending cuts. This means that they could very well find themselves stuck in the middle between angry voters and a furious Merkel.
In short, if the grand European project wants to stay on the rails, the eurozone needs growth.
Draghi is warming up the printing presses
Draghi clearly understands this. And earlier this month he dropped some massive hints that the ECB is about to begin QE. Specifically, he stated that the ECB has prepared measures to increase the amount of assets that it holds. He all but said that these measures would aim to increase the central bank’s holdings to its 2012 levels – roughly a 50% increase from where it is now.
(To cut a long story short, when the central bank buys assets, it is pumping money into the economy – money that wasn’t there before.)
Now, a cynic would say that he has broken promises before. You also could be pedantic and say that, since he hasn’t committed to buying government bonds, this isn’t technically QE.
However, it’s pretty clear that to buy assets on the scale required, he’ll need to include government debt in his action. The fact that all members of the ECB have signed off on this suggests that it is at an extremely advanced stage. The poor economic data also makes prompt action vital.
So, how should you plan for this? As we’ve said before – and as hedge fund manager Hugh Hendry notes in the second part of our interview with him – asset buying is going to be great for stocks.
One country that could do very well (although it’s probably the highest-risk play in the region) is Greece. Not only has it started growing, but sentiment data suggests that growth could soon reach as much as 2% a year.
And in any case, the Greek market is very cheap, trading at a discount to book value. This means that even if QE is delayed, it still looks good value. The easiest way to buy in is via the Lyxor Athex ETF (Paris: GRE), which is listed in Paris.
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Senior Writer, MoneyWeek
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This day in history
21 November 1969: The first permanent Arpanet link
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The FTSE 100 slipped back yesterday after poor economic data from the eurozone dented investor confidence.
Commodity stocks were among the worst hit. Rio Tinto and BHP Billiton were the day’s biggest fallers, each losing 2.6%. Anglo American was 2.2% lower, and Glencore fell 1.6%.
In European markets, the Paris CAC 40 fell 32 points to 4,234, and the German Xetra Dax added 11 points to 9,483.
In the US, the Dow Jones Industrial Average and the S&P 500 each rose 0.2% to 17,719and 2,052 respectively, and the Nasdaq Composite added 0.6% to 4,701.
Overnight in Japan, the Nikkei 225 gained 0.3% to 17,357, and the broader Topix rose 0.2% to 1,400. And in China, the Shanghai Composite rose 1.4% to 2,486, and the CSI 300 was 1.8% higher at 2,583.
Brent spot was trading at $79.71 early today, and in New York, crude oil was at $76.29. Spot gold was trading at $1,192 an ounce, silver was at $16.15 and platinum was at $1,217.
In the forex markets this morning, sterling was trading against the US dollar at 1.5646 and against the euro at 1.2557. The dollar was trading at 0.8026 against the euro and 117.71 against the Japanese yen.
And today, Rolls Royce said it has won a $5bn contract to supply engines to 50 new Airbus planes ordered by America’s Delta Airlines. Shares were up by 1.5% in today’s early trading.
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