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Munchau says nice things about the eurozone

by Jerome a Paris Mon Sep 25th, 2006 at 07:49:31 AM EST

Wolfgang Munchau, who has often been quite critical of the eurozone and the steering of its economies, has a more favorable point to make this week:

I expect the eurozone to be exceptionally stable in the long run. My optimism is supported by current macroeconomic trends. (...) In an environment of rising global inflation, some central banks will be more successful than others. Of the big central banks I would trust the ECB more than most to deliver this goal. In such an environment I would expect the euro to become increasingly important as a global reserve currency and as a medium of exchange in global transactions.

Whether the eurozone turns into a successful economy with high rates of growth and employment is an entirely different matter. That will depend on the quality of economic policies in member states, the eurozone and the EU. There is a reasonable chance that the eurozone will do better in the next eight years than in the previous eight, both in absolute terms and relative to the US and the UK.

What he is effectively saying is that the ECB has not let its mission (money stability) to be forgotten during the "era of the bubbles" of the past decade, and thus it will be in a much better position to deal with the aftermath. And the artificial boost to "growth" in some countries may start to be seen as what is what, i.e. a costly artificial boost.


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Worries that the pound is not in good shape:
"Our view is that the pound is overvalued," says Jason Daw, a senior currency strategist at Merrill Lynch. "We are near the highest level that we have had since 1990, when the pound was up around $1.90. The average rate over the past 16 years has been $1.64, and it's now $1.89."

Merrill Lynch forecasts an exchange rate of $1.75 by the middle of next year, with one euro worth 72p.

Daw argues that, as the UK is running a current account deficit, the pound will suffer because countries with current account deficits have historically seen the value of their currency fall when interest rates are rising in the world's biggest economies - which is now the case in the eurozone and in Japan.

The markets are pricing in one 25 basis point increase in UK interest rates, and a 40 per cent chance of a second increase between now and February. While the expectation of rising rates is bolstering the pound for now, a failure by the Bank of England to raise rates as expected could be the catalyst for the pound to fall.

by Colman (colman at eurotrib.com) on Mon Sep 25th, 2006 at 08:48:47 AM EST
I wouldn't disagree that the pound is probably overvalued, but the article is a mess, conflating the rate vs the dollar with the rate vs the euro and yen.

The likelihood is still that the pound will go down vs the euro (and I don't know about the yen, it's not something I've considered recently) but it's much less likely to change against the dollar unless the US economy and deficits change more radically than expected.

by Metatone (metatone [a|t] gmail (dot) com) on Mon Sep 25th, 2006 at 11:54:48 AM EST
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They'll certainly get no argument from me about the need to bring down the pound against the greenback, but, in fairness, that's obviously very much in my financial interest.  Life would get a lot easier if the pound fell to $1.64, or even $1.75.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Mon Sep 25th, 2006 at 01:03:27 PM EST
[ Parent ]
I thought Spain was suffering from an enormous bubble?

I hear the argument over the Fed vs. the ECB, but I think the BoE has done quite a respectable job since being granted independence.  It's difficult to argue with almost a decade free of recession.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Mon Sep 25th, 2006 at 01:06:49 PM EST
And that's not counting the years prior to independence.  The last recession in the UK was in -- what, 1992?

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Mon Sep 25th, 2006 at 01:07:40 PM EST
[ Parent ]
the longest bubble in modern times?

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Sep 25th, 2006 at 01:36:58 PM EST
[ Parent ]
Points for humor.

The price-to-income ratio is roughly 3/1 right now (a couple tenths higher last I checked), compared with a whopping 5/1 in the US.  A 3/1 ratio isn't great, -- 2/1 or 2.5/1, as I understand, is the range people should typically shoot for -- but it's not completely out of the ordinary, although, admittedly, the goalposts for "in the ordinary" have certainly shifted in the last 5-10 years for the housing market.

Compare the inflation figures for Britain and the US right now.  If the economy was driven largely by equity withdrawal, I think we'd see demand pushes the index quite a bit higher.  Britain's CPI is almost as low as America's core CPI (which is just sad for my home country quite frankly).

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Mon Sep 25th, 2006 at 02:38:44 PM EST
[ Parent ]


In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Sep 25th, 2006 at 06:18:30 PM EST
[ Parent ]


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