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Monday, 2 January 2012

Forecasts for 2012 in the Eurozone and EU


  1. Recession in the EU through German-inspired austerity but no break-up of the Euro.
  2. Worth a repetition: no break-up of the Euro. The problem of course is that in today’s 24-7 news-media, once it’s been mentioned as a possibility – initially made for Greece – then it has become necessary for folk to comment about it and for geeks to run scenarios…giving the possibility some potential credibility. It won’t happen…so long as Germany along with other net-payers in the north continue to de facto support the south through a mix of aid flows (EU Structural Flows) and related lending from the EIB for infrastructure AND indirectly from the sequenced adjustments in the Net Present Value (NPV) of outstanding debt stocks….
  3. …and yes, I expect the Portuguese and the Irish to ask for more dosh…sorry I mean “solidarity”.
  4. Easing overall monetary conditions in the Eurozone through a combination of de facto QE by the ECB (direct policy action) and a depreciating exchange rate (indirect factor) as a result of the weakening Euro-economy
  5. Silver Lining: Structural adjustment in peripheral economies in the Eurozone economies, consequent improvement in supply side economics and productivity – particularly into 2013-14. The key will be if these technocratic governments can survive into 2013….which I expect due to argument 2.
  6. Weak domestic demand as consumers faced with rising risk of unemployment and uncertainty, further rein in household expenditure. Ditto with corporates who will sit on cash rather than ramp up Capital Expenditure.
  7. The increasing role of Expectations and a new form of pro-cyclicity in fiscal adjustment viz bond spreads:  Sovereigns in the Eurozone will continue to fear the dark-side-of-the force from the Bond markets …as well as Madam Merkel – this risks a “self-fulfilling prophecy” whereby governments retrench faster in response to rises in risk-premia on the bond markets i.e. faster than justified.
  8. Relatedly, expect a continuation of the theme since mid-2010 of a Jekyll-and-Hyde market gyrations: (a) widening spread on sovereigns seen to by fiscally imprudent (b) narrowing of spreads as target Sovereign/s bows to the market pressure and promises an emergency supplementary budget ie cuts (c) an “oh gosh” 2nd reaction by the markets as realisation dawns that these very cuts will actually further compress growth and be worse off than the outset...and widening of spreads again
  9. Political risk: expect more dominos to fall after the detrothing of leaders in Iberia, Greece, Italy and Ireland….. what price Monsieur Sorkozy to be the next to face the guillotine of voters’ wrath?...for the interested Ladbrokes has an in-play market (http://sports.ladbrokes.com/en-gb/politics/french-politics/2012-french-presidential-election-e215023201) which shows that he is in 2nd place at 11-8. Not the place here, but worth considering what would happen to the mooted Franco-German axis and the proposed changes to the EU Treaty if Monsieur Hollande was elected.
  10. …further de-ratings of EU Sovereigns  although a generic across-the-board drop in grades for may not have the disastrous effect on putative investments – to where else will the supply of funds revert?
  11. Changes to the EU Treaty will take place as the de facto D-Mark Zone coalesces around the vision and funding from Germany.  A multi-speed Europe will become formal as the Fiscal Compact becomes binding on the first 9 signatories from the Eurozone as a form of Maginot Line for the defence of the Euro.
The Rest of the EU

  1. A mild depression in the UK due to a continuing loose Monetary Policy and a fiscal stance that will ease slightly into 2012 (plus the uplift from the Olympics and Diamond Jubilee for the Queen i.e. 60th year on the throne)
  2. Scandanavia and Baltics: the high tech service economy will continue to help ride out, but not totally, the slowdown in the EU – with much depending on the impact in Asia and the US. The Baltics have already undergone “internal devaluation” and will lecture the others on how its done…but still want sizeable EU transfers/aid from Brussels.
  3. Poland is an interesting one…with a sizeable internal market it will again avoid full-blown recession; both the Polish government and the OECD project 2.5% which may actually be a tad on the low side Rest of the New EU:  those with strong economic ties to Germany (Czech, Sloavika..) will trend-along with a whisper of growth…and perhaps increasing disenchantment from electorates.

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