A look at Europe’s competitiveness

A look at Europe’s competitiveness

Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 4th of September.

As we approach Thursday’s ECB policy meeting with bated breath, the jury is still out over the ECB’s possible intervention in short-term govt. bond market. Since the outcome is unpredictable because it depends on economics as much as on politics, let’s skip over the subject and look at Europe’s competitiveness.

The 17-member currency union, minus the two members who were inducted in 2004 and 2007 respectively, is significantly less competitive than the US with per capital GDP falling short by about $11,000 annually. More startlingly, Europe’s per capita productivity slipped 10 percent in the decade preceding the crisis despite being only 5 percent lower than the US in 1995. US clearly leveraged the information-technology much better than Europe.

Europe however, held its share of global exports with European companies outgunning their American counterparts, particularly while dealing with the emerging markets. Europe also created more jobs during the period. A survey by McKinsey & Co shows the EU-15 created 24 million new jobs between 1995 and 2008 with nine million jobs attributable to population growth. The US added 20 million jobs in the same period with 19 million due to rising population.

Though job creation was not evenly spread across Europe, bigger companies did relatively better. While number of Fortune 500 US companies tumbled, Europe’s share grew. Also profits of European companies grew faster than their American counterparts.

There’s little doubt for fiscal consolidation in South Europe, including France. But nobody should overlook structural reforms. The labour market reforms undertaken by Germany nearly a decade ago, despite being painful, paid rich dividends during the downturn. Though European productivity compares well with the US, the per capita difference can be explained due to significantly less hours put by the Europeans every year.


GBP/EURO – 1.2598
GBP/US$ – 1.5892
GBP/CHF – 1.5138
GBP/CAN$ – 1.5665
GBP/AUS$ – 1.5485
GBP/ZAR – 13.2754
GBP/JPY – 124.63
GBP/HKD – 12.3304
GBP/NZD – 1.9909
GBP/SEK – 10.5862

EUR: The single currency witnessed a dull session yesterday with both the GBP/EUR pair and the EUR/USD pair trading in narrow ranges as US markets were closed on account of Labor Day celebrations. The manufacturing PMI data for the 17 member nation showed further contraction, thus adding to the woes of the euro. Markets however, came to life after leaked media reports suggested ECB President Mario Draghi has said short-term bond purchase by the central bank doesn’t violate current EU rules while appearing before a European Parliamentary committee. This fuelled speculations that the ECB will announce some sort of peripheral bond market intervention at their next policy meeting starting Thursday. The economic data calendar is fairly light today even though investors are expected to keep an eye on Spanish employment data. The GBP/EUR pair opens at 1.2603 this morning.

USD: Monday’s manufacturing PMI data came in as a big surprise, triggering a Sterling rally that pushed the GBP/USD pair to a two-week high of 1.5906. While the PMI reading at 49.5 was still indicating contraction, it was much better than the 46.0 forecasted by economists. While markets now look forward to Wednesday’s all-important services PMI number given the economy’s heavy reliance on the services sector, yesterday’s strong data certainly bodes well for the third quarter. UK construction PMI is due today morning even though traders will be eyeing the US ISM number in the afternoon for hints of further assets purchase by the Federal Reserve. GBP/USD opens at 1.5905 this morning.

Have a great day!


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