HSBC econ­o­mist: Europe’s south can live with a strong euro

Financial Mirror (Cyprus) - - FRONT PAGE -

Mone­tary pol­icy is still very loose…

But the out­look has changed. Even though the struc­tural prob­lems of some coun­tries, like bad loans on bank bal­ance sheets, haven’t been solved yet, the econ­omy has re­cov­ered no­tice­ably nev­er­the­less. The eu­ro­zone’s econ­omy is per­form­ing bet­ter than ex­pected. Ca­pac­ity util­i­sa­tion is in­creas­ing and com­pa­nies are in­vest­ing more. The ECB can af­ford a less loose pol­icy un­der these con­di­tions. In­vestors know this and are bank­ing on a tight­en­ing of pol­icy in the near fu­ture.

The ECB’s re­cent meet­ings show that the money house is wor­ried about a strong euro. Does that not count against the idea of tight­en­ing mone­tary pol­icy?

The ECB has lit­tle rea­son to worry. So long as the euro does not over­shoot, even the coun­tries on the pe­riph­ery can live with a stronger cur­rency. True, some coun­tries have not yet re­gained their pre-cri­sis com­pet­i­tive­ness. But the grow­ing global econ­omy and re­vival of world trade also favours ex­ports in these coun­tries. Cal­cu­la­tions re­lat­ing to Ger­many show that an in­crease in world trade by 1% leads to an in­crease of 1.2% in terms of ex­ports.

Ex­ports from pe­riph­ery coun­tries also profit more from the good eco­nomic sit­u­a­tion abroad than they are damp­ened by the ex­change rate. We should also not for­get that cap­i­tal mar­kets con­di­tions re­main favourable. This ben­e­fits those coun­tries in par­tic­u­lar. That is why the ECB should not be put off from tight­en­ing up its pol­icy.

What mea­sures do you ex­pect Frank­furt to take?

The ECB is ex­pected in the au­tumn to an­nounce that it will grad­u­ally re­duce its bond pur­chases from the begin­ning of next year. At the end of 2018, they are likely to be phased

out com­pletely.

What does that mean for the euro?

The euro is pre­dicted to grow stronger against the dol­lar and reach $1.20 by the end of the year be­fore sta­bil­is­ing for the time be­ing. That would be slightly below its fair value.

What is the fair value?

I think that it should be around $1.27…

Which means that the euro tank.

still has miles left in the

So far, the euro has been driven mainly by spec­u­la­tive cap­i­tal in­flows. But there has been lit­tle change in long-term port­fo­lio in­vest­ments. If they were to gain mo­men­tum, then the euro would be strength­ened even fur­ther.

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