Europe appears to be finally waking up to the fact that European banks are still not sufficiently financed. Subsequently, they are not lending to small and medium sized enterprises, (fear of the bankruptcy risk to the bank) which is choking off business development and employment in Italy and the rest of the EU. This coupled with the fact that the Euro is still trading high versus other major currencies around the world and this limits Europe's ability to export cheaply and resulting in Italian companies who are struggling to survive.
So what are the options for the EU?.
The talk is of dropping the overnight deposit rate (the rate which banks receive for holding money with the European Central Bank) to a negative interest rate. i.e below zero. This is a big gamble as it has only been tested in Denmark and Sweden, in the past, and the results were inconclusive.
However, dropping ECB rates below zero should (theoretically) cause the banks to think twice about holding money with the ECB, whom they would now have to pay for that priviledge, and therefore might consider lending again. My guess is it won't work and a negative interest rate of 0.1% will not be sufficient.
It could also spell disaster for anyone trying to save in Euro and earn interest to live from, as interest rates on deposit savings could also drop further.
The other solution to the EU's problems is to start printing money, just like the USA, the UK and more recently Japan. The problem is the various EU politicial and country specific objections to bailing out countries who are, let's say, less efficient than others e.g. Germany versus Greece. But, money printing would in effect re-finance the banks and encourage them to start lending again. It would also cause the Euro to fall versus other currencies and exports would become cheaper. Holidays abroad would become expensive again and more reason to stay in the Eurozone, hence stimulating the economy further.
The other, slightly more attractive benefit for you and I, is that we have seen the effects this has on markets in all 3 of the countries listed above (UK, USA and Japan) who have been down the money printing road already. The financial markets (mainly stock markets) rose, in some cases quite considerably. Last year the Japanese Nikkei rose 53%. The S&P 500 also rose 30% and the FTSE 100 up 14.4% (Interestingly, the market returns reflect the amount of quantitative easing that each country is undertaking, Japan is well in the lead with money printing, weighted by GDP, twice as large as that employed by the USA!!).
Of course, if money printing starts in the EU then I think we can assume that some of that money will start to seek a home in the financial markets and inevitably push share prices higher. Maybe even house prices, but I am less convinced on that given the sluggish nature of the property market in Italy. But, this could represent a good opportunity for investors in the near future. The talk is of starting QE in the EU, later this year.
Lastly, it is worth noting that Euro printing is not likely to be unlimited and without clause, otherwise what is the incentive for countries like Italy to continue on its path to reform. What is likely, is that the EU will issue Eurobonds which will be issued to EU states on the basis that they continue their structural changes. So whilst money printing might be talked about as the solution to Italy's problems, it is only likely to push asset prices up, make anyone with investments feel a little bit better off than they did last year, but ensure that more pain will follow due to changes in policy and spending cuts. Italy is likely to suffer for some time to come.
If you are interesting in discussing money matters, from a tax planning perspective, general financial planning, or insulating your money again low interest rates or market instability, then you can contact me on gareth.horsfall@spectrum-ifa.com or on cell +39 3336492356
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