Tag Archives: eurozone

Chinese Investment

Thesis: Investment by foreigners (notably China) damages the economy in many ways.

I was born and raised in metro Detroit, Michigan, and have been familiar with the economic situation of Detroit for many years. In 2013, the city of Detroit went through bankruptcy on the public front. However, in the private realm, there were (and still are) two major proponents for the city. Their names: Mike Ilitch and Danny Gilbert – two billionaires who have been pouring their money and resources into rebuilding Detroit. They have done everything from purchasing casinos, buying buildings, knocking down blighted homes, and creating jobs through their various entities. When one of these two billionaires acquire property in Detroit, they actively improve the buildings and surrounding area in an effort to help revitalize the city. But this is not the case for all investors. Many Chinese investors purchase real estate in Detroit simply due to the low cost, but then do nothing to improve the property. So while some activist investors are aiming to improve Detroit and revamp the local economy; other investors are simply buying and holding hoping others will do the work for them. In an article by Forbes titled, “China’s Newest City: We Call it ‘Detroit”” it discusses the attraction of Detroit properties to Chinese investors.

My first example was one that hit close to home and contained some economic impacts that are less robust than my next argument, but nonetheless prevalent. An article by Bloomberg titled, “China Wants to Buy Europe” discusses how aggressive Chinese investors are being in foreign markets. “Until 2011, China was mostly a receiver of European investment, but then the debt crisis drove down asset prices. Some governments became desperate to privatize, and venerable corporations got less picky about potential investors. Chinese buyers acquired Volvo in Sweden, a large stake in Peugeot Citroen and fashion house Sonya Rykiel in France, the Piraeus Port in Greece, Pizza Express restaurants and the upscale clothing maker Aquascutum in the U.K. Chinese investment increased exponentially” (Bloomberg). Essentially, before the financial crisis, companies were able to be picky about where they received credit. Once the credit markets dried up, they needed to look for outside investors where the Chinese were aggressively investing.

Chinese M&A activity

The preceding image taken from the Bloomberg article does an excellent job depicting Chinese investment. The large increase in investing in the EU is concerning, due to the current financial position of the EU. The increased investment by the Chinese will increase their net exports (thereby decreasing net exports of the EU) which will have a further compounding effect on the EU. So China’s increased investment in the EU is further crippling an area that is already struggling on many fronts as evince by the near parity of the U.S. dollar and the Euro. That being said, if the Eurozone does make it out of the crisis, it is quite possible that these Chinese investors bought at the bottom.

The Euro Zone is a Failure

Breaking news out of Brussels today reports that talks to further Greek financing have broken down according to the Wall Street Journal.  Some economic backdrop on the situation, Greece is in a dire financial situation and needs financing in order repay debts and keep their government functioning. The Greek government, however, is not fond of the terms in which Greece will receive financing from the European Central Bank. Greece feels the terms put a further damper on their economy. But maybe the problem isn’t with Greece or the terms laid out by the officials of the ECB. Maybe the problem much deeper and is brought on by the existence of the Euro itself.

Last semester, I took a course on the European Economy that covered everything from just before the creation of the Euro to present day struggles. When the Euro was first introduced, it served as a unity symbol for all of Europe. The theory was that in order for European countries to be a leading global macroeconomic power, they needed to bind together. The Wall Street Journal has another article which discusses the Euro as a unity symbol and further describes the current Greece issues which can be viewed here. But surely 28 European countries did not form a single currency just to show they were united as one. Rather, the initial economic thought was that the Euro zone would benefit from economies of scale and that individual countries would benefit from a removal of trade barriers.

Now for the reality. There are also many harsh implications when uniting multiple diverse countries (and economies) into a single currency. First and foremost, monetary policy dissolves. The ECB still has control over monetary policy, but the needs of Germany may be very different from the needs of say Greece. When Greece is struggling with net exports, they are unable to set a more accommodating monetary policy via quantitative easing. This is a built in failure of the Euro zone. And it goes both ways. Former Fed chairman William McChesney Martin famously coined the phrase that the job of the Fed is to take away the punch bowl right before the party begins. The reason for this is to temper inflation. So if a country is experiencing tremendous growth with low interest rates, they are at risk of inflation. The Fed can simply raise the nominal interest rate. The German Bundesbank, however, has to leave that power up to the ECB. Ultimately, the Euro zone is too economically diverse to function as a single unit. It may take Greece falling out of the Euro zone to start a domino effect, but eventually, the Euro will fail.

Should Europe Utilize Quantitative Easing?

Quantitative easing is a measure taken by a central bank purchasing government securities in order to increase an economy’s money supply and, therefore, lower interest rates.

Aside from Greece, every country in the Eurozone’s long-term interest rates have fallen from their January 2014 rates. Some countries’ rates have fallen almost 2 and three-quarters of a percent, the average fallen amount among Eurozone countries (excluding Greece) being 1.77%. As many countries’ interest rates approach zero, quantitative easing fails to be as effective or even possible.

Governing Council member of the European Central Bank Jens Weidmann announced Thursday that the ECB will not be taking part in any quantitative easing strategies in the immediate future. The ECB would consider quantitative easing to remedy recent declines in inflation rates. However, Weidmann explained that these levels indicate disinflationary trends rather than deflationary trends. He attributes recent disinflationary trends with the falling costs of energy, which are temporary.

This comes after ECB executive board member Peter Praet explained that the ECB had “an obligation to act” to ensure it meets its remit of near 2% annual inflation for the region, he said.” Praet does not believe that inflation is caused by fluctuating energy prices.

Stephen Williamson, Vice President of the St. Louis Fed, argues that quantitative easing not only does not help disinflationary trends, it is deflationary in nature. His argument is as follows:

“when the Fed engages in quantitative easing it acquires securities held by investors in exchange for dollars. Investors will only accept those dollars, according to Williamson, if they believe the dollars will rise in value. Which is to say, the operation of QE seems to imply deflation.”

Senior Editor for CNBC John Carney argues that term premiums have much more to do with it. Investors will accept these dollars if term premium—the added return of holding long-term bonds over cash—shrinks. He believes that quantitative easing leads to shrinking term premiums and therefore it is a self-starting cycle that does not cause deflation.

I think Europe should not engage in quantitative easing until the deflationary period that Weidmann discussed ends. The risk of acting too quickly and not allowing other effects to take place would be hasty. The ECB should wait and see what will happen with energy prices and the cost of oil. Also, the ECB should observe Greece’s recovery and see if the Greece’s government will stick to the measures that have been placed on them and how that will affect the broader economy.

Italy, Europe Seek to Recover

The Eurozone has been in trouble as of late. A lot of the problems have come from Italy. Italy is one of the countries who most needs the help recently placed out by the European Central Bank. This past weekend, according to the article, “German Chancellor Angela Merkel and Italian Prime Minister Matteo Renzi said Friday that Italy and other European countries need to push ahead with structural changes following the much anticipated move by the European Central Bank to help boost the eurozone’s struggling economy.” http://www.wsj.com/articles/merkel-renzi-agree-reform-pace-must-continue-1422020519.  The much anticipated move these two men are referring to is the massive bonds buying program that will seek to boost the economy and improve struggling countries such as Italy. Italy, while not being the biggest economy, is certainly important for its stability. The Italian prime minister has run into problems due to labor unions and even legislators from his own party. The fact that he is seeking resistance from his own party indicates that the bills he is attempting to pass are indeed controversial. However, this may not be a bad thing as Italy certainly needs a little change. Opposition of any kind, unless it is stubborn partisan lockups, can spur creativity and idea creation. Overall, this is a positive sign coupled with the bond buying program. Some of the resistance Prime Minister Renzi is facing include aggressive labor guidelines, economic and institutional changes. The minister is seeking investing and a shift away from fiscal lockup. Angels Merkel recently said, “I already see the first signs of the effects of these reforms in Italy. But they need to be completed.” This is a positive sign as the aggressive stimulus begins to take effect. More than $1 trillion in newly created money has been pumped into the economy. The European Central Bank President Mario Draghi recently suggested that, “In light of Europe’s underlying problems of stagnant growth, high debt and rigid labor markets, the central bank’s largess alone won’t be enough to right its economy.” http://www.wsj.com/articles/ecb-announces-stimulus-plan-1421931011 . This can create growth for the economy and help lower rates, but it can not solve all these problems. However, after seeing what the US went through, each country in the eurozone can seek to set its own fiscal policy to supplement what the European Central Bank has already done. It is a tougher situation in Europe than in the US due to the fact that the United States only has one set of fiscal regulations to couple with the Fed’s stimulus. It will be incredibly interesting to see what happens in Europe. I think the recovery could be long and hard. If I were an investor, I would seek to invest in the US due to the fact that we seem to be the only safe move right now given troubles in China and in emerging markets. Between all these things and with falling gas prices, it has certainly been an interesting start to 2015!

Is Euro Zone Cohesion at Risk?(Blog7)

The win out of the leftist party Syriza in the Greek election seems to intensify the disturbance of Eurozone’s break up. As described in a Jan, 25 WSJ’s article written by Simon Nixon: “Over the coming weeks, it must strike a deal with a new radical left-wing government in Greece that it will likely find even more unpalatable – or watch Greece leave the eurozone with potentially disastrous consequences for the whole currency bloc.” (http://www.wsj.com/articles/greek-election-tests-eurozone-cohesion-1422222267?tesla=y&mod=WSJ_hp_LEFTTopStories)

However, personally I think the situation is quite clear for Greece. Either quit the euro zone and start a new currency, or reach a compromise in terms of the fiscal austerity plan with ECB, EU and IMF, and keep its membership in the euro zone. ECB president Mario Draghi once said: “a monetary union of 19 sovereign countries can only work if the citizens of each member state believe that they are better off inside the euro zone than out.” It is just like in a game theory, and Greece’s leave is a threat. Whether the threat will works depends on whether it is a credible threat. And whether it could becomes a credible threat depends on who will be hit harder once Greece quit the euro zone.

From Greece’s prospect:

Once leaving the euro zone, it will faces at least following problems:

1.The new government has to issue new currency, which will require a lot of time and effort.

2. Due to Greece’ debt problem, the value of the new currency would be depreciate, which will causes a series consequences such as deposit flight and inflation in domestic, and losing credit for external.

There are also some goodness if Greece leave the euro zone. The first and the most important is that it can get rid of its fiscal austerity plan forced by EU and make its local financial and fiscal policies more flexible.

On the other hand, the advantage of staying in euro is that they can still get aid from its neighbors as well as all the membership advantages such as free trade and no currency exchange fee. While the disadvantages of the staying is that Greece will still have to be under the pressure and restrictions, as well as suffering the gloomy prospective of euro.

From Other EU countries’ prospect:

Though different countries hold different idea, but Greece’s leave is definitely a bed idea. First of all, the value of bond or asset they hold from Greece would shrink dramatically due to the depreciation. They would also lose the benefit of no-barrier Greece market. More importantly, the exit of Greece would lead a chaos on Euro Union which is seen as a backward of the Union.

And I am afraid that the only benefit other EU countries could get from Greece’s exit would be an increase in their “safe-haven asset” or hedge fund.

I could highly simplify the problem into the following game theory table:

Other EU    ,      Greece Stay Quit
Stay     (8,10)    (-1, 1)
Quit Highly impossible Highly impossible

And if Greece is rational enough, it will not take the Quit action since it will hit the Union and itself both though Union would be hit harder. By the way, the number in the above table would change depends on the compromise conditions the Union and Greece reach finally. As well as whether Greece is a crazy man if it want to spare no effort to hurt the Euro Union. But personally I don’t think Greece will take extreme move and leave the Euro zone.




Weakened Euro

The Euro has been depreciating relative to almost all other currencies for a while now. The euro used to be able to buy ~1.40 American Dollars, but now has fallen to just 1.11 US Dollars. This has caused mixed opinions on whether this is a good thing for the Eurozone currently. This depreciating of the currency will bring many benefits to the members of the Eurozone and help get their economy, which has been struggling the most out of all major developed countries following the Great Recession of 2008. This will be done by the influx of demand for now cheap European goods. Consumers from all over the world will flock to the Eurozone as goods produced there have become much cheaper. A simple example of why consumers will flock to European goods is: imagine that France produces widgets. France’s widget costs 100 euros. As late as one year ago, this widget would have cost an American $140. This is because to buy a widget, an American must first exchange his American dollars for European euros. The exchange rate was ~1 euro=1.4 U.S dollars. Today though this same consumer can purchase this widget for only $111. This will cause a lot more consumers to demand these widgets and able to afford them! As Tommy Stubbington wrote in his Wall Street Journal article, Parity Rumblings Emerge Over Euro, “”The euro area stands to be a winner of the currency wars in 2015,” said Jonathan Baltora, inflation linked bonds fund manager at AXA Investment Management, which oversees 607 billion euros of assets, referring to the possibility that a weaker currency would make European goods cheaper than those produced in Japan and elsewhere.” This is precisely what is going to happen, and what Europe NEEDS to happen to finally get out of this period of virtually no economic growth lately. The European Central Bank knows this and that is why (or atleast part of the reason why) the ECB announced a quantitative easing plan of bond buybacks. As Joseph Adinolfi writes in his article, Euro Records Largest Weekly Loss Since Septemeber 2011, “BK Asset Management’s Boris Schlossberg rhetorically asked if eurozone quantitative easing was intended to drive the euro even lower, arguing that ECB Executive Board member Bernard Coeure admitted as much during an appearance from Davos, Switzerland that was broadcast on CNBC Friday. “Taken from that perspective the ECBs actions make perfect sense,” Schlossberg said in a Friday morning research note. “The QE announcement has shaved another 300 points off the EUR/USD exchange rate and the pair is now fully 20% lower than just nine months ago.”” This will hopefully give the entire Eurozone the economic boost it needs to get back on track as an economic heavyweight!