MUCH HAS been written and said about the EU constitution recently, but while I will touch on the subject in this article there is other interesting European financial news to report on.
Outlook for European equities
As both the French and Dutch “no” votes were anticipated by the markets, the result had already been priced in.However, any resulting political uncertainty could lead to slight volatility.According to an editorial in The Times entitled “Why a French no could boost your portfolio”, fund managers were looking forward to European stock markets falling back over the coming weeks because it would be a good time for investors to buy these shares:“Any weakness in the European markets over the next few weeks should be viewed as an opportunity by investors to rebuild their European holdings.”
A survey by data company Morningstar found that European funds have soared 70% since March 2003 and that 41% of fund managers believe that Europe will be the best performing region over the next 12 months.
The Times explains that although the EU is facing some challenging times politically, the outlook for continental equities remains positive.The double no vote, while not threatening the Union, will affect sentiment and future enlargement plans.This could be good news for European equities and the Euro since many investors have been concerned about enlargement.
While the Euro may initially be weakened by the referendum results, some analysts say it may actually lead to a stronger Euro in the longer term.
The Euro –
One of the worst
The single currency was not helped by a report about a secret meeting in Berlin where top German officials apparently discussed the possibility of the Euro collapsing.
On 1 June the German magazine Stern published extracts from an internal finance ministry document discussing ‘brutal divergences’ in the Eurozone’s growth, credit and price levels.It suggested that the slow growth in Germany is directly linked to the Euro, which had fatally distorted real interest rates (after inflation) across the Eurozone.
According to Stern, finance minister Hans Eichel was so alarmed by the findings that he called the secret meeting.Morgan Stanley’s Eurozone economist warned attendees that Europe was “on a slippery slope towards disintegration and instability.The risk of a Euro wreckage has risen significantly.” The magazine said it was time to admit that Germany had made a mistake by adopting the Euro and called monetary union “one of the worst economic blunders made by Germany since 1945”.
Although the finance ministry played down the implications – “Mr Eichel believes that monetary union is a success” – this did not stop the Euro plunging to eight month lows and closing down 1.223 against the Dollar – down 9.7% so far this year.
ECB “fiddles while Rome burns”… but is there a chance of an
interest rate cut?
The European Central Bank (ECB) held interest rates at 2% for the 25th month in a row at its June meeting.As usual, much speculation followed over what the future will hold for Euro rates.
The OECD’s Economic Outlook at the end of May had called on the ECB to immediately lower Eurozone interest rates to get the region’s economy back on track.It recommended a ‘significant’ cut of 0.5%, saying; “it is of course a matter of central importance for the growth prospects of the countries involved, but also, to some extent, for the credibility of the Economic and Monetary Union itself.”
Countries like Italy and Germany are also calling for an emergency cut in interest rates and the ECB has been accused of “fiddling while Rome burned”. ECB president, Jean-Claude Trichet, however, has always insisted that he will not be pressurised by politicians and hit back by blaming Europe’s economic slump on national governments.
However, when pressed on the possibility of future rate cuts, he did not repeat his usual remark that a cut was “not an option”. Analysts took the slight shift in rhetoric as a signal that a cut had been discussed and that the bank may be positioning itself for a possible future drop to stimulate the economy.
Trichet also confirmed that the bank was under pressure to raise its inflation ceiling from 2% to 3% to ease the strain on countries like Portugal and Italy which are trapped in an uncompetitive position.Whilst lower interest rates may help improve Eurozone growth, low interest rates and higher inflation is not good news for Euro savers.
More bad news for European savers is the Savings Tax Directive which is now literally on our doorsteps – the start date of 1 July will be here in the blink of an eye.
A timely article in the Expat Telegraph warned readers to “brace yourself for taxing times ahead” and that the new regime affects “anyone who is resident for tax purposes in EU Member States and who earns interest on savings.”
EU countries will now automatically exchange information with relevant tax authorities.Jersey, Guernsey and the Isle of Man have agreed to implement the Directive but with more flexibility for their customers.Their banks will be allowed to offer clients a choice of retention tax and automatic exchange of information. Not all organisations will offer this choice, in which case tax will be deducted at source.
The Telegraph article also reminds readers that “Experts claim that there is a legitimate way for expatriates to exclude themselves from the EU Savings Tax Directive rules by investing through offshore companies and life assurance policies.”
2005 is certainly proving to be an eventful and historic year for Europe.
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