London – Nomura, the global investment bank, today published a major 128-page study on the economic and market prospects for Europe, and particularly the euro area.
The report is optimistic. While the euro area monetary union had design flaws from the outset, there is strengthening evidence that the policies that are to be announced by Europe’s leaders in the “Grand Bargain” on 24 March are likely to fix many of these issues. As a result, Europe stands to become less prone to the sorts of problems that have been afflicting it, and better able to deal with new types of shock should they occur.
Monetary union is strong
The report takes issue with euro-sceptics who argue that the euro area has no long-term future. It emphasises that putting in place the requisite policies to ensure the survival and further development of the euro area into a robust monetary union depends ultimately on political will. And the evidence is that this is, and is likely to remain, strong. It is hard to envisage the Chancellor of Germany and the President of France not taking all possible steps to keep the euro area intact. Neither would seem likely to wish to go down in history as having presided over the dissolution of the euro area.
Euro needs to strengthen its governance
This report, entitled “Europe will work”, is led by Nomura’s chief European economist Dr Peter Westaway and consultant economist to Nomura Dr John Llewellyn. Both have deep experience both of economic policy and of financial markets. Commenting on the report, Peter Westaway said: “The outlook for Europe is generally strong and we believe that in time Europe will work, however, in the short to medium term, the euro area needs to strengthen its governance, fix its banks and reform its structural policies before any further ground can be made.”
European imports exceed US imports from China
With investors in mind, Dr Westaway and Dr Llewellyn examine the European project comprehensively, from its historical, economic, policy, and financial market perspectives. The viability or otherwise of the euro area has major implications for investors and producers in the US and Asia, for a range of reasons, including that Europe is a huge economic area holding 32 per cent of world GDP, bigger even than the US which holds 25 per cent of world GDP. In addition, Europe is a major market for other countries’ exports with European imports exceeding US imports from China. Any break up scenario would therefore bring chaos to world financial markets, provoking recession in Europe which in turn would be transmitted powerfully through the trade links to the rest of the world. From a currency perspective, many countries, including Asian countries, the world’s biggest savers, have increasingly been looking to diversify their foreign exchange holdings away from the US dollar. Since the euro was introduced in 1999, the euro’s share of global foreign exchange reserves has increased from 18.2 per cent to 26.9 per cent. Hence a judgement about the sustainability, or otherwise, of the euro area is fundamental to the plethora of decisions that investors, producers, traders, and other agents have to take, both day by day and over the longer term.
The report begins with an examination of the evolution of the euro area from an idea to a final plan of European cooperation; and of the honeymoon period following the formation of the European monetary union. This process has spanned more than 50 years. The report then documents the development of the current crisis, and explains its principal causes in an analytical “anatomy of the crisis”, before discussing the wide range of policy mechanisms which need to be put in place.
Three chapters, written by Nomura fixed income and equity analysts, then examine the substantial changes that have already taken place in the markets as a result of the crisis, and set out likely implications for the evolution of these markets, including in particular the banking sector. Special attention is also paid to Emerging Europe and its importance to Europe’s future. With Estonia being the latest country to join the euro and a further eight countries looking to join, the expansion of the euro area could bring collective benefits and speed the recovery.
The report concludes that this current crisis may not be the last. Europe being a collection of individual and individualistic nations, achieving fundamental reform usually requires a crisis. But provided that political will remains, Europe will probably continue to proceed stepwise to sustainability. (Nomura/mc/hfu)
For further informationand the full report please contact:
Irina Starkova Nomura: +44 (0)207 102 7231
Nomura is a leading financial services group and the preeminent Asian-based investment bank with worldwide reach. Nomura provides a broad range of innovative solutions tailored to the specific requirements of individual, institutional, corporate and government clients through an international network in over 30 countries. Based in Tokyo and with regional headquarters in Hong Kong, London, and New York, Nomura employs over 27,000 staff worldwide. Nomura’s unique understanding of Asia enables the company to make a difference for clients through three business divisions: retail, wholesale (global markets, investment banking, and other wholesale), and asset management.