Elephant In The Room?

28/06/2013 at 5:09 pm

The market’s focus of late has been on the Fed, US growth and China. There has been news out on all three in recent days – but there has also been some news out on Europe.

This week saw further agreement on an EU-wide framework for banks (specifically as regards the topical subject of bailouts). It accompanies ongoing work on arrangements for federal – sorry, supranational – oversight of national budgets.

News on European affairs passes with little comment these days. This would have been unthinkable a short time ago. When budgetary oversight was agreed about 18 months ago it was headline news across the world. And the catalyst for the whole sequence of emergency summits, the insolvency and bailout of Greece just over three years ago, was of course seismic: during the week after the bailout announcement itself, the Euro Stoxx 50 index fell by over 11%. Then, after the attention-grabbing trillion dollar support package for the whole eurozone was announced the following Sunday, it rallied by over 10% in a day.

Now there is no such excitement. Like the banking system and budgetary oversight measures, the emergency EFSF and ESM programmes have come along quietly – from zero to just shy of €200bn in funds raised in three years. Once upon a time – when eurozone bond markets went haywire in 2011 – the then ten-year EFSF bond, backed by guarantees from all eurozone sovereign states, traded briefly at 2% over the yield on its German government benchmark. Now that spread stands at 0.6%, and despite all the volatility has dribbled along in a range of 0.4% – 0.7% all year.

This is quite a turnaround. From star of the show (albeit as anti-hero), Europe hardly seems to appear on stage any more. Which begs the question: are we being complacent? Do arguments over 0.5% vs 0.3% on US incomes and 7.0% vs 7.5% growth in China miss the bigger point? Has the European crisis become the elephant in the room?

As a bear case it is a tempting proposition. Just when we have all started ignoring Europe, a new bailout or political upset will come along and upset the apple cart again. If only those headstrong Eurozoneans would adopt an expansive approach to fiscal policy and improve their competitiveness via currency devaluation, etc., they might enjoy the kind of economic success which characterised Britain in the 1970s (this blog has never fully understood the logic of this confidently-touted advice).

There is an alternative, of course. A slew of indicators in recent weeks, from activity gauges to measures of confidence, have shown that the beaten-up Continental economy might at last be turning the corner and emerging from its painful though shallow slump into the anguished and shallow upturn its central bank expects.

Still, the pace of recovery in Europe doesn’t matter so long as it finally occurs. No one thinks of Europe as the engine of world growth. But it is obvious that the benefits of entrenchment in activity there would extend to those countries who are seen that way (China, for instance).

Without wishing to extend the list of animals too far: if Europe turns out to be the elephant in the room the bears will undoubtedly have their day. Otherwise – at some point – it will be the turn of the bulls again.


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