Connect with us

Economic

Monetary independence is overrated, and the euro is on the rise

Avatar

Published

on

Shortly after the latest bout of the eurozone debt crisis — Greece’s battle with the rupture of the single currency in summer 2015 — a colleague bet that within a decade the euro would lose at least one member. So far, it’s been quite the opposite: the monetary union just got a member, with Croatia joining at the start of the new year.

This force of attraction is not a one-off. Remember that during the most difficult years of monetary union, one Baltic country after another stepped forward and joined. The next Bulgaria will no doubt be allowed to adopt the euro soon. (A number of smaller and poorer European jurisdictions also use the euro either through unilateral adoption or as a result of the informal private sector euro process.)

One could say that there is nothing to see here – that it would be surprising if small, open economies did not want to participate in monetary policy making for the currency that dominated their trading relationship. But the notion is such that the euro in its current form is so doomed – especially among Anglo-American economists – that some reflection on its recent expansion is timely. Because old misgivings are becoming increasingly unconvincing, while ongoing changes in how money works speak to the advantage of the euro.

In recent years it has become – or should have been – increasingly clear that monetary ‘independence’ in the sense of having one’s own floating currency is not all it has to be. The advantage is supposed to be that a depreciating currency can offset negative shocks by boosting exports. As the fall of the pound sterling in 2016 after Britain’s EU referendum showed, however, in a world of long and complex supply chains across borders, currency depreciation could make your population poorer by raising the price of imports, with no support for export volumes. .

Advertisement

Meanwhile, the benefits of monetary integration are being demonstrated by the energy price crisis in Europe. Take Slovakia. Yes, it has to deal with similarly high inflation as its non-euro neighbours. But it does so while enjoying a much lower interest rate (2.5 percent for the European Central Bank) than the Czech Republic and Poland, where borrowing costs are three times higher, or 13 percent in Hungary.

Size matters in a global economy whose rhythm is still set by the US financial cycle, and only the monetary union of euro economies gives the European Central Bank a degree of independence from the US Federal Reserve.

Second, it is now easy to see the vulnerabilities that emerged during the eurozone crisis as a type of crisis that could hit anyone, including economies with independent floating currencies, rather than a unique weakness in the euro.

Italy remains the country where pessimists believe the combination of high debt and low growth should eventually cause the euro’s demise. However, last summer it was not Italy, but the new populist government in the United Kingdom that severely shook the markets with its irresponsible policymaking. In the end, the Bank of England had to step in to contain the sovereign yields.

While the ECB may still be tested in this regard, it has the advantage of being more independent of its political masters than any national central bank. If anything, the Bank of England has more reason to fear monetary finance charges – which it was evidently keen to disprove – and which complicated its message when it turned from selling gold bonds to buying them in the market’s fright in the fall. By contrast, the European Central Bank created a permanent tool to deal with similar events last summer, with little controversy.

Advertisement

All this suggests that the euro will become more, not less attractive over time. The appeal of different currencies will be further altered by how they manage the next big leap in central banking: the introduction of an official digital currency. So far, only peripheral economies like the Bahamas and Nigeria have gone all the way — although China is clearly primed for its capacity to expand the digital renminbi it has been experimenting with.

Among the rich economies, the European Central Bank has quickly moved to the top spot. Finance ministers swung defensively behind the digital euro after Facebook’s move in 2019 to create a private global digital payment system. But their support has now been bolstered by looming business opportunities in an economy of “programmable” safe money.

Formally, the digital euro is still only in the exploration phase. But politically, it has reached a point of no return. After Croatia, future entrants to the monetary union will enjoy having a developing digital currency in the bargain.

martin.sandbu@ft.com

Source link

Advertisement

Continue Reading
Advertisement
Click to comment

Leave a Reply

Your email address will not be published.

Economic

We need to pay more attention to skewed economic signals

Avatar

Published

on

By

The writer is chair of Queen’s College, Cambridge and advisor to Allianz and Gramercy

Inflation was the dominant economic and financial issue of 2022 for most countries around the world, especially for advanced economies that have a consequential impact on the global economy and markets.

The effects have been seen in declining living standards, increasing inequality, increasing borrowing costs, stock and bond market losses, and occasional financial mishaps (fortunately small and so far contained).

In this new year, recession, both actual and feared, has joined inflation in the driving seat of the global economy and is likely to replace it. It’s a development that makes the global economy and investment portfolios subject to a wide range of possible outcomes — something that a growing number of bond investors seem to be aware of more than their equity counterparts.

Advertisement

International Monetary Fund iYou will likely review soon Her economic growth forecasts again, predicting that “a third of the world will be hit by recession this year”. What is particularly notable to me about these worsening global prospects is not only that the world’s three major economic regions – China, the European Union and the United States – are slowing down together, but also that this is happening for different reasons.

In China, a chaotic exit from the wrong Covid-19 policy is undermining demand and causing more supply disruptions. Such headwinds to domestic and global economic well-being will continue as long as China fails to improve the coverage and effectiveness of its vaccination efforts. The strength and sustainability of the subsequent recovery will also require that the country more vigorously renew a growth model that can no longer rely on greater globalization.

The European Union continues to deal with energy supply disruptions as the Russian invasion of Ukraine continues. Strengthening inventory management and reorientation of energy supplies is well advanced in many countries. However, it is not yet sufficient to lift immediate constraints on growth, let alone resolve long-term structural headwinds.

The United States has the least problematic view. The headwinds to growth are due to the Fed’s struggle to contain inflation after mischaracterizing rate increases as fleeting and then initially being too timid to adjust monetary policy.

The Fed’s shift to an aggressive front-load of interest rate hikes came too late to prevent the spread of inflation in the services sector and wages. As such, inflation is likely to remain stubborn at around 4 percent, be less sensitive to interest rate policies and expose the economy to greater risk for accidents from additional policy errors that undermine growth.

Advertisement

The uncertainties facing each of these three economic areas suggest that analysts should be more careful in reassuring us that recessionary pressures will be “short and shallow”. They need to be open, if only to avoid repeating the mistake of prematurely dismissing inflation as transient.

This is especially important because these diverse drivers of recessionary risk make financial fragility more threatening and policy shifts more difficult, including potentially Japan. Get out of interest rate control Policy. The range of possible outcomes is extraordinarily large.

On the one hand, a better policy response, including improving the supply response and protecting the most vulnerable populations, can counteract the global economic slowdown and, in the case of the United States, avert a recession.

On the other hand, additional policy errors and market turmoil can lead to self-reinforcing vicious cycles with rising inflation and rising interest rates, weakening credit and compressed earnings, and stressing market performance.

Judging by market prices, more bond investors are better understanding this, including by refusing to follow the Fed’s interest rate guidance this year. Instead of a sustainable path to higher rates for 2023, they believe recessionary pressures will lead to cuts later this year. If true, government bonds would provide the yield and potential for badly missed portfolio risk mitigation in 2022.

Advertisement

However, parts of the stock market is still weakly bearish pricing. Reconciling these different scenarios is more important than investors. Without better alignment within markets and with policy signals, the positive economic and financial outcomes we all desire will be no less likely. They will also be challenged by the risk of more unpleasant outcomes at a time of less economic and human resilience.

Source link

Advertisement
Continue Reading

Economic

Macro hedge funds end 2022 higher, investors say, while many others take big losses By Reuters

Avatar

Published

on

By


© Reuters. FILE PHOTO: Traders work on the trading floor of the New York Stock Exchange (NYSE) in New York City, US, January 5, 2023. REUTERS/Andrew Kelly

By Svea Herbst Baylis

NEW YORK (Reuters) – Some hedge funds betting on macroeconomic trends have boasted of double and even triple-digit gains for 2022, while other high-profile companies that have long been on technology stocks have suffered heavy losses in volatile markets, investors said.

Rokos Capital, run by Chris Rokos and one of a handful of so-called global macro companies, gained 51% last year. Fund investors this week, who asked not to be identified, said Brevan Howard Asset Management, the company where Rokos once worked, posted a gain of 20.14% and Caxton Associates returned 16.73%.

Haider Capital Management’s Haider Jupiter Fund rose 193%, an investor said.

Advertisement

Data from hedge fund research showed that many macro managers have avoided crumbling stock markets that have been rocked by rapid interest rate increases and geopolitical turmoil, including the war in Ukraine, to rank among the best performers in the hedge fund industry. The company’s macro index rose 14.2% while the general index of hedge funds fell 4.25%, its first loss since 2018.

Equity hedge funds, where the bulk of the industry’s roughly $3.7 trillion in assets are invested, fared worse with a loss of 10.4%, according to HFR data. And while that beat the broader stock market’s loss of 19.4%, some high-profile funds posted even bigger losses.

Tiger Global Management lost 56% while Whale Rock Capital Management ended the year with a 43% loss and Maverick Capital lost 23%. Coatue Management ended 2022 with a loss of 19%.

But not all companies that bet on technology stocks suffered. John Thaler JAT Capital finished the year with a 3.7% gain after fees after a 33% increase in 2021 and a 46% gain in 2020.

Sculptor Capital Management (NYSE::), where founder Dan Och is fighting the company’s current CEO in court over his salary increase, posted a 13% drop.

Advertisement

David Einhorn’s Greenlight Capital, which bet that Elon Musk would be forced to buy Twitter, ended the year up 37% while Rick Sandler’s Eminence Capital rose 7%.

A number of so-called multi-manager companies where teams of portfolio managers bet on a variety of sectors also boast positive returns and have been able to deliver on their promise that hedge funds can deliver better returns in distressed markets.

Balyasny’s Atlas Fund (NYSE: Enhanced) gained 9.7%, while Point72 Asset Management gained 10%. Millennium Management gained 12% while Carlson Capital ended the year with a 7% gain.

Representatives for the companies either did not respond to requests for comment or declined to comment.

Source link

Advertisement

Continue Reading

Economic

German automakers point to easing supply chain problems

Avatar

Published

on

By

Sales at BMW and Mercedes-Benz jumped in the final months of 2022 as the German premium auto brands indicated supply chain problems plaguing the industry were abating.

Automakers around the world have experienced parts shortages since the pandemic, especially semiconductors, leaving many of them with large fleets of incomplete vehicles that can’t be delivered to customers.

BMW and Mercedes each said their full-year vehicle deliveries fell last year by 4.8 percent and 1 percent, respectively, due to Suppliers Bottlenecks as well as lockdowns in China and the war in Ukraine.

But supply pressures eased in the last quarter of the year, as BMW recorded a 10.6 percent jump in sales, with 651,798 vehicles delivered, and Mercedes fulfilling 540,800 orders, up 17 percent from the same period in 2022.

Advertisement

BMW He said the main effects of supply chain bottlenecks and continued lockdowns were felt in the first six months of the year, adding that “sales were steadily picking up in the second half.”

Mercedes boss Ula Kallenius told the Financial Times last week that the list of problems in the auto supply chain was declining, but added that long waits for cars would continue into 2023.

“One chip is enough to be vital [ . . .] Missing, and then you can’t finish the car, even if you have everything else.

Both brands recorded strong sales growth electric car. Mercedes, which last week announced a plan to build 10,000 charging docks, said EV shipments grew 124 percent to 117,800 last year compared with its predecessor.

Similarly, BMW reported strong growth in electric vehicle sales, with deliveries of fully electric vehicles doubling last year to 215,755.

Advertisement

Analysts at Bank of America said that sales of electric vehicles, including hybrid cars, reached a historic peak last November, with 1.1 million units sold. They attributed this largely to the upcoming phase-out of customer subsidies in Germany.

Participate in Mercedes BMW and BMW prices held steady Tuesday morning as investors priced in an image of an improving showing.

Rolls-Royce, a subsidiary of BMW, announced Monday that sales have hit a 119-year record, driven by strong demand in the United States, its largest market.

The luxury brand has been largely unaffected by the semiconductor pressure, mainly because it makes relatively few compounds and therefore needs fewer chips.

Source link

Advertisement

Continue Reading
Advertisement

Trending