Stock markets plunge over fears for Italy

11:56 am - August 5th 2011

by Left Outside    

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Fears for the global economy have intensified further following lacklustre growth from Italy and growing fears of contagion in Europe’s periphery. Here are some graphs from the FT.

Stocks are way down. This does not augur well for growth. The UK’s major trading partners are all in Europe, so our stocks have taken a major hit too.

Investors are also fleeing to safety, interest rates on even sclerotic UK and dysfunctional US government debt are down.

These governments can borrow cheaply than last week or last month, not because they are well run (have you seen George Osborne?), it is because they are less of a basketcase than many others. We’re seeing a flight to safety.

As Duncan highlights, BNY Mellon has recently even started charging people to store money there, so worried are investors.

The Bank of England, Federal Reserve and European Central bank need to act quickly to stem the market’s (and my) panic. They need to reaffirm a commitment to providing liquidity if it is needed and they need to commit to reflating the core Western economies so they can deleverage and expand more easily. I’m getting that 1937/2008 feeling again.

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About the author
Left Outside is a regular contributor to LC. He blogs here and tweets here. From October 2010 to September 2012 he is reading for an MSc in Global History at the London School of Economics and will be one of those metropolitan elite you read so much about.
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Story Filed Under: Europe ,Foreign affairs ,News

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Reader comments

The ECB needs to speed up its act, and be a little less conservative, as I put it here:

Strange paradox – the single currency is strong while many of the economies using it are having a hard time.

Strange paradox – the single currency is strong while many of the economies using it are having a hard time.

On the other hand, the two are probably linked. I’m sure Greece, Italy, Spain and Portugal would love a little external demand!

3. Luis enrique

I don’t know how much the stock market matters. Isn’t it about time investors noticed the world economy is weak?

Here’s a relaxed take on it:

@ 1. Tim Fenton

It is not really a ‘ strange paradox ‘, Tim. If you think about the external value of the euro as having embedded the constituent weightings of each member. The weaker members drag the currency down from where it would be without the weaker members. The stronger members raise the value of the currency from where it would be without the stronger members. Therefore, we have an apparent equilibrium that is not an actual equilibrium for any of the members. The dominant factor in understanding the euro is that it still contains Germany as the largest member. Therefore, there is still a hidden D-Mark element to the euro.

Think about what would happen in the event of a euro-core currency containing only the strong economies of the north. The currency would appreciate considerably. JP Morgan analysts reckon the EUR-core/USD would appreciate above 1.80. Therefore, the current euro for the core could be around 40% undervalued. Hardly surprising that Germany and surrounding nations have enjoyed something of an export boom. On the other hand, the southern periphery are operating with a currency that is 40% overvalued. So no surprise why they are doing badly. Therefore, it is not an equilibrium for any of the members. The euro is both weak and simultaneously strong as the two forces work to offset each other.

Moreover, European trade is pretty much net balanced, albeit with significant internal imbalances. That helps in the battle of least ugly currencies. The ones I feel sorry for are Switzerland, who have attracted the unwanted capital flows that would previously had flown into the D-Mark. Germany being a much larger economy could have coped much better. The CHF has significantly appreciated and will damage Swiss firms profitability. Their costs are in CHF, and their cross-border revenues are worth much less. The Swiss franc is at record levels vis-a-vis the euro.

Right Left outside. It is starting to smell very very bad. Here in Australia, we have been spared a lot of the Euro grief due to high commodity prices. However, our market got smashed yesterday along with everyone elses.

The thing about the crash starting again is that those who think borrowing money or spending what you don’t have is a good idea must now see that it isn’t.
This is a lesson the left just don’t want to learn, but must do.

7. Leon Wolfson

@6 – What rot. Flatline growth and inflation are the dangers.

We are not Greece, Spain or Italy. We do not have to do the kind of social cleansing the Tories are rubbing their hands over, or smashing pillar of future growth with the glee they’re displaying.

We’re heading for more debt AND cuts AND no growth.


You make my point for me!

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