Euro to rise on need of nations to cut debt

European governments started to establish a framework for cutting the debts they have accumulated to tackle the global financial crisis, setting out an agreed timetable for embarking on their exit strategies.

But the more they talk about the removal of stimulus, the further the euro rises against the U.S. dollar and other major currencies, threatening a hoped-for recovery.

At their monthly meeting Monday and Tuesday, finance ministers from the European Union’s 27 member states agreed that they should start to bring their budget deficits down by 2011 at the latest toward the 3% of gross domestic product required under EU rules.

The ministers agreed that “substantial fiscal consolidation is required to halt and eventually reverse the increase in debt and restore sound fiscal policy.” Actual consolidation is conditional on their economies being firmly in recovery, and the finance ministers also left room for maneuver in agreeing that the “specificities of country situation should be taken into account.”

But new reports showed the magnitude of that task. With the British economy in its sharpest recession in decades, spending on public services has soared. The U.K.’s public sector borrowed a net 14.8 billion pounds in September, the highest on record for that month. The government’s full-year target for net public-sector borrowing is 175 billion pounds, or 12.4% of gross domestic product.

In early Europe trading Tuesday, the euro nudged higher, almost reaching the psychologically significant $1.50 level against the dollar before easing a little. The euro’s rise has been underpinned by expectations that the European Central Bank is likely to start moving its interest rates higher before the U.S.

The Wall Street Journal October 2009

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Ba and Iberia to Merge, at Last

After more than a year of negotiations, British Airways and Iberia, two of Europe's largest airlines, are finally joining forces. Late on Nov. 12 the carriers agreed to a $7 billion merger that will create the world's third-largest airline by revenues and No. 7 by passenger traffic. Regulators must still green-light the deal, which is expected to be completed before the end of 2010.

For the two struggling carriers, the proposed marriage is a high-stakes effort to ensure the viability of their businesses. The global economic downturn has whacked passenger levels—especially for higher-margin business travel—while rising competition for inter-European flights from low-cost carriers has eroded revenues and profits at both airlines. At the same time, other European flag carriers, particularly AirFrance - KLM and Lufthansa, are siphoning off market share for long-haul routes to North America and Asia.

Faced with these challenges, BA and Iberia have a stark choice: merge or continue to lose market share and money. The deal will combine British Airways' strength in transatlantic and Asian routes with Iberia's dominance in European flights to Latin America (and a growing presence across North Africa). Annual cost savings from the merger should amount to about $600 million five years after the deal goes into effect, the companies say.

There are plenty of potential problems that could scupper the merger, though. First and most important, it needs to be approved by the European Commission. The British and Spanish airlines also will have to reconcile two starkly different corporate cultures, especially a large salary gap between BA and Iberia employees. And ongoing labor disputes, including potential strikes by both BA and Iberia employees before the end of year, may unhinge efforts at both airlines to weather the current economic storm.

Business Week November 2009

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The biggest bill in history

THE worst global economic storm since the 1930s may be beginning to clear, but another cloud already looms on the financial horizon: massive public debt. Across the rich world governments are borrowing vast amounts as the recession reduces tax revenue and spending mounts—on bail-outs, unemployment benefits and stimulus plans. New figures from economists at the IMF suggest that the public debt of the ten leading rich countries will rise from 78% of GDP in 2007 to 114% by 2014.

Not since the second world war have so many governments borrowed so much so quickly or, collectively, been so heavily in hock. And today’s debt surge, unlike the wartime one, will not be temporary. Even after the recession ends few rich countries will be running budgets tight enough to stop their debt from rising further. Worse, today’s borrowing binge is taking place just before a slow-motion budget-bust caused by the pension and health-care costs of a greying population. By 2050 a third of the rich world’s population will be over 60.

What should policymakers do? A sudden fit of fiscal austerity would be a mistake. Even when economies stop shrinking, they will stay weak. Japan’s experience in 1997, when a rise in consumption taxes pushed the economy back into recession, is a reminder that a rush to fiscal tightening is counterproductive, especially after a banking bust. Instead of slashing their deficits now, the rich world’s governments need to promise, credibly, that they will do so once their economies are stronger.

Broadly, governments should pledge to clean up their public finances by cutting future spending rather than raising taxes. Most European countries have scant room for higher taxes. Tax reform will be necessary—particularly in places, such as Britain and Ireland, which relied far too much on revenues from frothy financial markets and housing bubbles.

The Economist June 2009

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