From The International Herald Tribune: U.S. Fed’s signals on tightening put euro zone in a further bind BY JACK EWING VLOTHO, GERMANY — The European economy has many problems. Here’s one that is out of its control: the U.S. Fed. Recent fears that the Federal Reserve could begin withdrawing its economic stimulus have prompted investors to drive up interest rates around the world, putting business loans further out of reach for companies in Spain, Italy and France. For the United States, a Fed easing up on stimulus efforts would signal good news — that the American economic rebound has enough momentum to continue on its own. But for most of Europe, still struggling through a recession, the Fed’s signals could make a recovery even harder to achieve. The problem is evident to companies like Herbert Kannegiesser, which makes equipment here for large commercial laundries. It is the kind of niche industrial business that has continued to grow even during the economic crisis and helped sustain German exports. But laundry systems costing hundreds of thousands of euros are a tougher sell when higher interest rates make loans harder to come by. ‘‘Europe is our home market,’’ Martin Kannegiesser, son of the company’s founder, said in an interview in this rural corner of northwestern Germany. ‘‘Banks, especially outside of Germany, are very reluctant to give loans and financing to small and medium-size businesses. That is a problem.’’ The Kannegiesser conundrum is a microcosm of the issue confronting Mario Draghi, president of the European Central Bank. He must keep trying to find ways to steer the euro zone out of recession even as his American counterpart at the Fed, Mr. Bernanke, contemplates how soon to take his foot off the accelerator of the U.S. economy. Unfortunately for European executives and central bankers, what happens in Washington doesn’t stay in Washington. Rising yields, or market interest rates, on U.S. Treasury bonds have had worldwide repercussions. The yield on the 10-year Treasury bond is now 2.66 percent, compared with 2.19 percent before remarks by Mr. Bernanke on June 19 raised expectations that the Fed will soon begin to taper off its stimulus program of buying government securities. The better return available on U.S. debt draws money away from Europe and pushes up rates for euro zone government bonds as well as commercial loans. Yields on Spanish and Italian government bonds rose sharply after Mr. Bernanke’s remarks. Euro zone yields have retreated somewhat since but are still higher than they were before June 19. The Spanish 10-year bond is at 4.79 percent, compared with 4.5 percent in early June. ‘‘From the European point of view the worst thing that could happen is an increase in long-term interest rates, which is what the Fed action is threatening to do,’’ said Charles Wyplosz, a professor of international economics at the Graduate Institute in Geneva. The timing is terrible for Europe. The European Central Bank is still fighting a severe credit crunch in Southern Europe, which is making it difficult for countries like Spain to emerge from a prolonged recession that has pushed the unemployment rate to 27 percent. Even before Mr. Bernanke mentioned the word ‘‘taper,’’ lending in Europe had been in a slump. In May, the most recent month for which data is available, loans to corporations excluding banks fell at an annual rate of 3.1 percent, according to E.C.B. data. The E.C.B. in early May cut its main interest rate to 0.5 percent, a record low. Last week, in an unprecedented step, Mario Draghi, the E.C.B. president, assured investors that the rate won’t rise above 0.5 percent for an extended period and could be cut further. Meanwhile, European political leaders are still a long way from addressing the root causes of the euro zone crisis, and need all the slack they can get from low interest rates. On Wednesday, European Union officials announced a plan to deal with failing banks that would include centralized decision making and an emergency fund. But the plan, considered essential to prevent bank failures from taking down entire nations, could face resistance from Germany and other countries wary of giving up control over their banks. In countries like Italy and Greece, leaders have been slow to dismantle bloated civil services that burden businesses with red tape and stifle growth. And elected officials have been unwilling to dismantle labor regulations that discourage hiring and firing. Many euro zone governments including France are still struggling to get debt under control. For them, higher interest rates are toxic. France’s 10-year bond was at 2.24 percent Wednesday, up from 2.08 percent in early June. ‘‘The effects in Europe are pretty ominous,’’ Mr. Wyplosz said. ‘‘Rising interest rates are the best way to bring a budget to disaster.’’ In the private sector, higher rates on commercial loans threaten to strangle business investment and private consumption. Even blue-chip borrowers could begin to suffer, said Erik Berglof, chief economist of the European Bank for Reconstruction and Development, an institution supported in part by the United States that encourages economic development in former Communist states as well as North Africa. ‘‘Banks were throwing credit lines at their best clients while not lending to the more risky, small and medium-sized enterprises,’’ Mr. Berglof said in an interview in Frankfurt on Wednesday. ‘‘Now I think we’re going to see less availability for the better clients as well.’’ In the past the E.C.B. refused to commit itself on the future direction of interest rates. Last week’s break from that tradition was at least partly an attempt by Mr. Draghi, in remarks at a news conference, to push back against higher rates exported from America. But analysts doubt whether mere words will be enough to withstand the power of the Fed and the gravitational pull of the enormous Treasury market. ‘‘Whether it can be a credible shield, we have some doubts,’’ said Nick Matthews, an economist at Nomura in London. For Mr. Draghi’s strategy to work, Mr. Matthews said, the E.C.B. might have to be more specific about how long it will keep rates low and what indicators might cause it to begin raising rates. Not all the news from America is bad for Europe. A stronger U.S. economy should be good for European exporters like the German carmaker Volkswagen, which is in the midst of a revival in America. A stronger dollar is also good for many European companies. The dollar has risen about 4 percent against the euro since June 19 as money flowed into U.S. assets. The cheaper euro makes European products less expensive when purchased with dollars, and gives exports an extra nudge. But Mr. Wyplosz of the Graduate Institute said a much more drastic decline in the euro would be needed to compensate for the negative effects of higher interest rates. Germany has escaped the worst of the euro zone downturn so far. Growth is at a standstill, but unemployment is only 5.3 percent. Germany could even benefit from higher interest rates. Low rates on mortgages have contributed to rising home prices in cities like Frankfurt, and stirred fears of a bubble. But the case of Herbert Kannegiesser, the commercial laundry supplier, illustrates how woes elsewhere in Southern Europe could disturb the German idyll. For now, Kannegiesser seems to be holding up well, thanks in part to orders from outside Europe. In June, a special 42-container freight train left a rail yard near Vlotho bound for Sochi, Russia. It was loaded with €10 million, or $13 million, worth of equipment for the laundry that will serve the Winter Olympics in February, Martin Kannegiesser said. Mr. Kannegiesser said he worried, though, about the insecurity prevalent among businesses in the euro zone. Sometimes his company has gone so far as to help customers get credit when their own banks are reluctant. ‘‘But,’’ he said, ‘‘there are limits.’’ ◼ Get the best global news and analysis direct to your device – download the IHT apps for free today! For iPad: itunes.apple/us/app/international-herald-tribune/id404757420?mt=8 For iPhone: itunes.apple/us/app/international-herald-tribune/id404764212?mt=8
Posted on: Thu, 11 Jul 2013 02:29:39 +0000
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