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European Crisis: Historic turning point for the European and Global Economy ?

The 26 and 27 October European Summit was followed by a spectacular rise in the Markets. Does this mark the historic turning point as some analysts would have us believe or is it simply some extra time won?

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According to Patrice Gautry, UBP’s Chief Economist, the European Summit was the start of a new era on a global level - the arrival of the Chinese on the international stage. China has said it was prepared to assume the EFSF debt. Even if it serves Chinese interests, this economic commitment brings with it a political cost, since Europe is an export market comparable to that of the USA. Patrice Gautry emphasized that "China will expect something in return for its involvement with the EFSF: recognition of the Chinese economy as a "Market Economy" This new status will open up, for China, important investment opportunities and allow penetration into the European markets. He believes that the 27 of October marks a turning point, in that it is now the developing countries which are the creditors of the developed world.

"Even If the EFSF is a good problem solving tool and a genuine safety net, it does not mean it is THE solution to all the difficulties encountered by the Eurozone countries", explains Patrice Gautry. Economic conditions remain difficult, European States must still follow strict austerity measures in order to re-establish equilibrium and growth. He added "Today, one cannot be sure that this fund will be sufficient. He added that there are a number of uncertainties which exist and the need to refinance States and Banks should be reviewed every three months".

For Eric Delannoy, the Vice President of Weave, an operational strategy consulting firm, this European Summit stands out because of the absence of any real joint project. "The urgent organisation of successive European Summits is the tangible manifestation of, a political, not an economic crisis, a crisis of disagreement between governments unable to focus on a common goal and their inability to devise lasting mechanisms to boost the economy. The media - exposed attention to the dance of negotiations has only one objective - an electoral one, aimed at salvaging any lost popularity for the leaders.

It is impossible to believe that a low end recapitalisation of French banks, to the value of 8,9 billion, will be enough to protect them from risks, when the doubling of their equity in 4 years has not been enough. The only use it will serve will be to restore investor confidence in the short term, he said.

According to him, increasing the banks capital requirements, resolves nothing: "banks keep their cash instead of using it to finance the economy. Here is the perverse effect of Basel 3: to accentuate, by making it institutional an implosion of the banks, who will have to dedicate more of their activities (collection, allocation of capital) to satisfying ineffective regulatory ratios. The real consequences will be, a slowing down of investments and consumption. In an atmosphere of irrationality, it is essential to go from a standpoint of restraint to one of action to re-stimulate the economy, Eric Delannoy explains, for whom, the European Summit would have been historic in the end, not because of its contents in knowing how to institute structural policies, but rather and solely for what it will have helped to avoid, and that is a worsening of the crisis.

Azad Zangana, an economist at Schroders feels that the measures announced are a very important step in the right direction and confirms the opinion that European participants are willing to take unprecedented measures to ensure the survival of the European Monetary union.

Even if the details of these steps are still unknown, he feels happy about the direction that Europeans leaders have taken "The plan should reduce the volatility of the financial markets, even if the damage to the real economy is probably already done. The economy of the Euro Zone is expected to slow down from now until the end of the year, but the steps announced will probably avoid a second "credit crunch" and a deep recession" he explained. However, more than half the economists interviewed by Reuters say that the 50% debt reduction for Greece is not enough to make the country viable and that the amount of 1000 billion euros’ guarantee is not enough to reassure the markets about the FESF’s ability to come to the rescue of Italy and Spain should the need arise.

Yesterday, the markets applauded the conclusions, however incomplete, of the European Summit with the CAC 40 taking 6.28%, the DAX 5.35% and the EUROSTOXX50 Index almost 3.21%. The monthly increases in the Dow Jones and the Nasdaq are the most important since 1972 and 1987 respectively

Next Finance , October 2011

Article also available in : English EN | français FR

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