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September 01 2014

Commentary by David Fuller

Germany must lead the way to Eurozone growth

Here is the opening from this informative column by Roger Bootle for The Telegraph: 

As the weather begins to cool, the European crisis is hotting up. Pressure is mounting on the German establishment to decide what they want for the future. Are they prepared to bend to make the euro work at least tolerably well? Or are they determined to stick to their guns – even if this puts the euro at serious risk?

The remarkable thing about recent developments in the eurozone is that, for once, the peripheral countries – Spain, Italy, Greece, Portugal and Ireland – are not in the frontline. Don’t get me wrong. Things in all these countries remain utterly dire. The current unemployment rates are frankly disgraceful. But some of these economies have begun some sort of recovery (although notably not Italy).

Spain is the most striking example. Over the past four years, Spanish exports have increased by more than 20pc and the economy grew by 0.6pc in Q2. Most impressively, Spain has moved from a current account deficit of 10pc of GDP in 2007 to a surplus last year of 0.8pc.

Things are not so “good” in the core countries of Germany and France. Germany’s economy has stalled, registering a small contraction in Q2. Meanwhile, in France, things are desperate. The economy has now stagnated for two successive quarters and the public finances are in poor shape. The government seems paralysed. France needs two things: to sort out its public finances and to reinvigorate its private sector with lower taxes, less labour protection and a reduced role for the state.

This would be difficult for any government but for a socialist president famed for indecision and who came to office pledging to oppose austerity, defend France’s social model and protect the French from the ravages of capitalism, they are nigh on impossible. M Hollande’s response has been to sack a leading minister and rejig the cabinet. This is rather like changing the first mate on the Titanic. France is heading for a monumental crisis that has been building up for years. Far from being protected from the ravages of capitalism, the French need to be brought to embrace them. Bonne chance! Mind you, as an inveterate Keynesian, I share the critics’ views about fiscal contraction. Yes, France needs to reduce its public deficit, but not by increased taxes and not yet.

It, like the rest of the eurozone, needs economic growth. That alone will bring some reduction in the deficit and when it is secured, policy can switch over to further deficit reduction.

David Fuller's view

The EU’s bureaucrats remained focussed on their gradual push towards federalism.  However, they may never achieve this goal, for better or worse, if the member states are unable to avoid deflation, lower unemployment and generate GDP growth.  That will not be easy in this post credit crisis environment, where economic recovery is now further impeded by the necessary sanctions against Russia. 

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September 01 2014

Commentary by David Fuller

Merkel Says Europe Will Not Allow Russia "Attack" on Ukraine

Here is a section of this Bloomberg report:

German Chancellor Angela Merkelsaid the European Union will press ahead with tougher sanctions against Russia as evidence mounts that President Vladimir Putin is behind “attacks” on Ukraine.

“It’s become ever clearer that, from the beginning, this hasn’t been about a conflict within Ukraine, but a conflict between Russia and Ukraine,” Merkel told German lawmakers today in the lower house of parliament in Berlin.

The remarks underscore the German leader’s growing exasperation with the escalating conflict and her government’s more assertive role in seeking to resolve it as Russian soldiers continue an incursion into Ukrainian territory.

Merkel was among EU leaders over the weekend who said further measures against Russia are necessary, and gave the European Commission a week to deliver proposals for sanctions that may target Russia’s energy and finance industries.

Addressing the risks involved for Europe’s largest economy should measures against Russia harden, Merkel said Germany is prepared for any economic fallout from the actions.

“Being able to change borders in Europe without consequences, and attacking other countries with troops, is in my view a far greater danger than having to accept certain disadvantages for the economy,” she said earlier at a press conference in the German capital.

David Fuller's view

The headline above overstates Merkel’s position but she appears determined to up Russia’s costs for Putin’s murderous and cynical intervention in Ukraine.  What few Westerners are pointing out, however, is that Putin is violating the terms and spirit of the Budapest Memorandums on Security Assurances, 1994, when Ukraine agreed to give up its nuclear weapons.  This was initially signed by Putin’s predecessor, Boris Yeltsin, in 1994 but later reaffirmed by Putin on December 4, 2009.  Here is a sample:

1. The Russian Federation, the United Kingdom of Great Britain and Northern Ireland and the United States of America reaffirm their commitment to Ukraine, in accordance with the principles of the Final Act of the Conference on Security and Cooperation in Europe, to respect the independence and sovereignty and the existing borders of Ukraine;

2. The Russian Federation, the United Kingdom of Great Britain and Northern Ireland and the United States of America reaffirm their obligation to refrain from the threat or use of force against the territorial integrity or

political independence of Ukraine, and that none of their weapons will ever be used against Ukraine except in self-defence or otherwise in accordance with the Charter of the United Nations;

3. The Russian Federation, the United Kingdom of Great Britain and Northern Ireland and the United States of America reaffirm their commitment to Ukraine, in accordance with the principles of the Final Act of the Conference on Security and Cooperation in Europe, to refrain from economic coercion designed to subordinate to their own interest the exercise by Ukraine of the rights inherent in its sovereignty and thus to secure advantages of any kind;

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September 01 2014

Commentary by David Fuller

Japan Vows to Strengthen Economic Ties With India as China Rises

Here is the opening from this Bloomberg report:

Prime Minister Shinzo Abe pledged a sweeping upgrade of economic and security ties with India, saying Japan would double investment and expand defense cooperation amid concerns about China’s expanding influence in the region.

Abe and his Indian counterpart Narendra Modi at a summit meeting in Tokyo yesterday agreed to upgrade ties to a special strategic and global partnership. Abe offered 50 billion yen ($480 million) in infrastructure loans and pledged 3.5 trillion yen of public and private investment and financing in India in five years.

“I often say that Japan-India relations have more potential than any other ties in the world,” Abe said. “This time, hand in hand with Prime Minister Modi, I want to boost ties in every possible field and elevate this to a special strategic and global partnership.”

The declaration comes three months after Modi took office pledging to take a tougher stance with neighbors China and Pakistan on border disputes, and hours after Japan said three Chinese coast guard vessels entered waters near disputed islands. Japan is courting India as it seeks to counter China and deter the use of force in disputes over contested territory.

The two leaders are known to have a close relationship, and Abe made the unusual gesture of traveling to the ancient capital of Kyoto at the weekend to host an informal dinner for Modi. Abe also accepted an invitation to visit India for a summit in 2015. Modi, 63, also brought a delegation of executives with him on the four-day trip.

David Fuller's view

Closer economic links between India and Japan make sense and I expect to hear much more about this over the next few years.  India will benefit from Japan’s technology and Japan would gain from India’s abundant labour market and also its range of management skills.  

India remains a stock market in form, with gains of over 30% for the Nifty 50 Index this year, in USD terms, on optimism regarding Narendra Modi’s government, rising corporate profits and the fastest GDP growth in 2 years.  

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September 01 2014

Commentary by David Fuller

The Markets Now

8th September 2014, at the East India Club

 

David Fuller's view

I look forward to seeing more subscribers and friends at this forthcoming Markets Now event, and please do not hesitate to bring anyone along who you think might also enjoy the evening.  We have another interesting guest speaker - Jonathan Neill, CIO of FPP Asset Management, specialising in Emerging Markets. 

Iain Little and I enjoy these informal gatherings and discussions, not least in the Club’s bar following the three presentations. If you have not previously attended a Markets Now event, I can assure you that there is never any of the marketing hype that one can encounter at too many financial seminars.  Instead, these are an extension of small Markets Now discussions that I held in my office some years ago.  Today, they are in a much nicer venue, with more speakers, experienced participants and often lively, interactive presentations.   

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