Posted on 05/29/2008 8:26:07 PM PDT by bruinbirdman
Long-term private investors are pulling their money out of the eurozone at the fastest rate since the creation of the single currency, according to a report by the French bank BNP Paribas.
Foreign direct investment (FDI) in plant and factories has turned deeply negative, reaching minus €149bn (£117bn) over the past year. It dropped to minus €19bn in March alone as the soaring euro pushed labour costs in southern Europe to uncompetitive levels.
The annual exodus of private funds from eurozone equities and bonds has reached almost $280bn. Taken together, the total outflows have topped €400bn in 12 months and may spell trouble for Europe's industry as the economic downturn gathers pace.
Airbus is leading the rush to hollow out production inside the currency bloc, switching operations to the US, Mexico and India. "It really worries me that private accounts are selling assets like this," said Hans Redeker, BNP's currency chief.
The euro is being held aloft by central banks in Asia, Russia, and the Middle East seeking an alternative to the dollar as a place to park their mushrooming currency reserves. In effect, the eurozone is now suffering from the reserve currency curse.
While Asian funding has helped ease the credit crisis in Europe, it has also pushed the exchange rate to damaging levels. There is a trade-off effect. The eurozone has gained financial flows, but has lost industrial and investment flows.
These official investors appear to be picking and choosing eurozone bonds more carefully than before, demanding a higher premium for Latin debt. Data collected by the Bank of New York Mellon shows large withdrawals from Italy and Greece since August.
The eurozone racked up a record current account deficit of €15.3bn in March, seasonally adjusted. BNP Paribas said the so-called "PIGS" (Portugal, Italy, Greece, and Spain) are dragging down the trade performance of the bloc.
All have suffered a relentless loss of competitiveness since EMU was launched. The deficits have reached 10pc of GDP in Spain and 14pc in Greece. None has begun to narrow the gap in unit labour costs with Germany, ensuring that the inevitable adjustment will be more severe when it comes.
Indeed, Spain's inflation surged to a record 4.7pc in May. The country now faces the most acute "stagflation crisis" in the developed world. House prices have fallen 15pc nationwide since September, according to the developers' association (APCE). Madrid University warned this week that Spain's property slump could throw 1.1m people out of work.
Mr Redeker said the 'PIGS' quartet was now facing "collapse", with mounting signs of stress in France as well after consumer confidence fell to the lowest level in 20 years. French property sales fell 28pc in the first quarter.
"There are a lot of ugly surprises in store as deleveraging finally hits Europe. Investors are going to stop treating the eurozone as if it were Germany, and take very close look at the deficits of the southern countries. We can expect bond spreads to widen significantly," he said. "We will discover in this downturn whether the eurozone is really an 'optimal currency area'. This is the test."
Jean-Claude Trichet, the president of the European Central Bank, told Italy's Il Sole that the euro had been a shield against the financial storms of the past year. "We've strangely forgotten what happened in the 1980s and 1990s when we all our national currencies created so many problems. Today, we've had an impressive correction in global finances. Imagine what would have happened without the euro," he said.
the so-called “PIGS” (Portugal, Italy, Greece, and Spain)
Tee Hee! /sarc
Any prognostications on who will be the first to abandon the euro?
Will a fatwa be issued requiring Mohammedans leave this bloc?
UK, Denmark and Sweden already have rejected the euro.
I wonder if, when the EUrotopia Constitution/Treaty is ratified, all countries have to start using the euro?
yitbos
Hold onto your hats. Global war is coming.
All is not lost, yet. Once their Competition Commissioner gets together with the officers of the European Central Bank, the European Investment Bank and the Court of Auditors in the requisite meetings, conferences and summits, I’m sure it will all be resolved.
RE-CREATE '68!!!! (Don't forget that the Euros had a hard time that summer also.)
What's your thinking behind that statement?
I’ve been wondering when the Euro bubble would burst.
The question may very well be, "Who will be the first to be kicked out?"
yitbos
Hmmmmmmmm, I was going to buy some hardware items from France (yeah, I know, but this mfg does good work) think I oughta wait ‘em out a bit?
Actually, the politicians are assuming that the breakdown of the poorer countries will force the EU to become a single country--that it will speed up by 10-20 years the elimination of national governments and put Brussels/Germany in charge of everything.
Most of us know that all of our currencies are just fiat money. How does Spain, after making a total hash of it's economy, reinstate the Peseta or Italy get anyone to have any faith in the Lira?
Ambrose Evans-Pritchard had a brilliant article in the Telegraph earlier this month: "EMU is more unworkable than ever."
Here were some of his comments.
We forget now that the euro was launched for entirely political reasons by Mitterrand, Kohl, and Delors against fierce objections from the German Bundesbank and the European Commission’s own economists. The experts warned that the eurozone was not an "optimal currency area"
Indeed, Mr Delors' circle relished the idea of a beneficial crisis -- "the worse, the better", I was told by one EU official who attended his Cabinet sessions -- believing it would enable Brussels to advance the European Project. A euro crisis would the midwife of a full federal economic system.
The French.
WSJ and The Economist have had articles about it. Stratfor raised the possibility almost 8 months ago. They have 10% unemployment and need more inflation and deficit spending to kick start the econ after decades of socialism. Germany’s still content. Hence the problem. EUR works great when everyone agrees. But now a lot of the countries of the zone (Italy, France, Spain, Portugal, Benelux coutnries) have lost their favorite economic stimulus tool - deficit spending. It doesn’t bode well for the currency. Guess we’ll see.
“are assuming that the breakdown of the poorer countries will force the EU to become a single country”
Holy cow are they in for a rude awakening. Nationalism is alive and well in the ole Europe. Hell, the EU constitution attempts were voted down in France, of all places, where it was authored. Jeez.
If you’re in an enterprise, and you take on chronically weak partners, well — sooner or later it catches up with you, just exactly as is beginning to happen in Wonderland.
I doubt there is any there to speak of.
Scott McClellan says that Bush is responsible for the fall of the Euro. And the Iraq war.
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