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A world in waiting

A world in waiting

Uncomfortable trigger points in Europe 

by David Marsh in Boston

Tue 15 Oct 2013

The just-ended annual meetings of the International Monetary Fund (IMF) and World Bank in Washington were characterised by nervous anticipation. The world has been showing dogged patience while Congress decided whether it really wishes to wreck the international economy by forcing the US Treasury to renege on its debts. Everyone wants to know when the Federal Reserve will start its 'tapering' - a word Ben Bernanke dislikes because it implies the Fed has actually made up its mind. We are waiting for communication skills and worldly wisdom from Janet Yellen during her congressional confirmation hearings.

In Europe everyone’s been digesting the ambiguous results of the German elections, held on 22 September, which were supposed (some people fondly believed) to unleash Europe on a new path towards a more cohesive monetary union. We're holding our breath while the Germans move in a leisurely and complex way to forming a government. It may take weeks or months. Meanwhile some important decisions, for example on banking union, are not being made. Decisions will have to be made, in 2014, about writing down important components of Greek government debt. This will involve, this time, the central banks of Europe taking a hit by accepting a stretching out of Greek maturities on bonds held on their books and a reduction in interest rates towards zero.

The European Central Bank (ECB) and other central banks (especially the Bundesbank) will not like that. There will be histrionics with governments and finance ministers that will inflame fresh passions about bailouts and central bank independence.

The unfinished business in Europe, the US shutdown, and declines in emerging market growth are all having an effect on Europe. No one representing (as opposed to promoting investment in) the Old Continent at the Washington meetings was in any way upbeat about Europe. This is still a highly anaemic recovery, with the IMF forecasting just 1% growth for the euro area in 2014 after declines of 0.4% this year and 0.6% in 2012. Interest rate cuts are still being discussed at the ECB, which, at the same time as the Fed is starting finally to wind down its asset purchases, might be seen (again) as a harbinger of a weaker euro, something the Europeans must want to help kick-start faltering growth. One of the most problematic countries is Italy, despite the new-found stability of the Rome government, where competitiveness and industrial production are still falling.

There are half a dozen trigger points that could spark fresh European financial turbulence. These include the forthcoming German constitutional court judgment on the Bundesbank’s participations in planned, conditional bond purchases by the ECB, where fresh constraints are likely to be put on German action. The world will wake up to the realisation that the new German government will be no more conducive than the old one to mass bailouts in Europe. The left-leaning governments in Rome and Paris may get restive. Anti-euro parties will gain further traction ahead of the European elections in May. The IMF may make some critical noises about the Europeans’ lack of progress towards debt sustainability.

The world has a lot to wait for, but little to look forward to.

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