Help! The euro is becoming a soft currency

Once the market believes a story, however absurd, the herd instinct guarantees that everybody follows in due course. The logic-defying story at the moment is that the globlal crisis will hit the eurozone much worse than the US economy. The euro yesterday lost further ground and fell to a low of $1.39, which is a fairly drastic decline from its peak a few months ago. The fall in the euro also means that the Europeans are not benefiting quite as much from the fall in oil prices, but it has the potential to improve the position for European exporters if this weakness were to persist. Some US economists already predicting that the US may already be in recession, as unemployment is not only growing. We suspect that the relative assessments of the US and the euro aera will be subject to continued fluctuating assessments as this cyclical downturn goes on.

Ecofin sceptical about French efforts to combat downturn

Ahead of the ECOFIN meeting this weekend in Nice the 27 member states showed their reservation with respect to the proposal of the French presidency for a coordinated response to the economic downturn reports Le Monde. Several delegations fear that the French just want to push through their own ideas like the renovation of the dialogue with the ECB, which are hardly consensual among member states. Jean Claude Juncker,who is to be confirmed for a third term as Eurogroup president this weekend, said that the Union needs neither new structures nor instructions. Several finance ministers also warn for a weakening of the stability and growth pact.

Kiel Institute predicts a very long recession for the euro area

The forecasts for the euro area and for Germany are getting a lot more pessimistic. According to FT Deutschland, the Kiel Insitute for World Economics predicts continued weakness into 2009, with virtually zero economic growth lasting right into the middle of the year. There is a lot fretting about these numbers constitute a technical recession or not. We leave this debate to others, but it is important to note that this recession/downturn, which is relatively shallow, threatens to be somewhat longer than some people thought, if these forecasts prove correct. So this is question between shallow and short, or shallow and normal cyclical. The projected numbers for German quarterly growth are: Q3: 0, Q4:0, Q1:-0.1,Q2:0.2,Q3:0.3. The Kiel Insitute forecast for the whole of 2009 is a meagre 0.2%, for the euro area as a whole 0%, with Italy and France growing at negative rate in 2009. This is the most pessimistic forecast we have heard so far.

Employment is already falling in France

The economic slowdown has immediate repercussions for French employment, writes Le Monde. In the second trimester, employment fell for the first time in five years. There are 35000 jobs less in the French economy (0.2% fall) and 20000 less employees. According to observers, this is the first time that the economic contraction reaches the labour market immanently.

Thomas Fricke on the German economy

In his column in FT Deutschland, Thomas Fricke makes the point that Germany is theoretically in a good position to get through this downturn – the labour market is reformed, corporate balance sheets are strong. But Germany is threatening to repeat their old mistakes during downturns, dogmatic monetary policies (through its representative at the ECB), pro-cyclical wage increases, and trying to offset falling tax revenues with savings measures to ensure that the budget deficit is not rising.

France pressures the Irish to make up their mind

The French government presses the Irish government to accelerate its efforts to present solutions on how to proceed after the Irish No vote to the Lisbon Treaty. Le Monde writes the Irish government are still discussing an opinion poll on why people voted no while the Elysee Palace expects the Irish government to present concrete options within the French presidency. They want the framework fixed ahead of two rather eurosceptic EU presidencies, the Czech and the Swedish, next year. The French government also counts on convincing the Czechs to use their presidency for their own ratification process of the Lisbon Treaty, in the hope to isolate the Irish No.

Another German-German merger

Angel Merkel and finance minister Peer Steinbruck apparently intervened personally to ensure that Postbank, the state owned bank owned by Deutsche Post, would not be sold to a foreign banking. In the end, Deutsche Bank to over Postbank, which unlike Deutsche Bank has a very intensive retail network in Germany. Deutsche Bank is paying €2.6bn for initially a stake of just under 30%, with the remaining 20% to follow in three years. After the takeover of Dresdner Bank through Commerzbank, this is now the second high profile merger in the German banking system. (This is not exactly what we all had in mind when we talked about German bank consolidation, but we knew they would find a corporatist way.) The story is covered by every German newspaper.

Is the Fed going to bailout Lehman

The Big Picture blog reports that KKR and Blackstone are interesting in buying Lehman Brothers on the cheap, but that they are look for a Bear Stearns type deal where the Fed is taking on some $20bn or so of the company’s debt. (So much for the idea that moral hazard problems are only for the long run, whilst we are getting the fire engines out!). Here is more on the story.

Optimism on US house prices

There has been a rare note of optimism about US house price when Prof Karl Case, co-author of the Case-Shiller house price index, predicts that the falls in US house price is nearing its end (even though both his nominal and real indices are still a long way above the trend line). In a Brookings paper he cites two reasons. One is that prices have already been recovering in nine out of the 20 cities of the index. The other is that one of important ratios – between house price and household income – is nearing normality. (it is still above the trend, but this indicator shows a much more benign picture than the price-to-rent ratio). There is more in the WSJ economic blog.

Eurointelligence wishes to thank the Collegio Carlo Alberto for their support to help us maintain eurointelligence.com a free public service.