European economy

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Eurozone: Deflation and weak activity support QE

LONDON | Barclays analysts | We believe this week’s data on inflation and economic activity have provided more arguments to step up ECB’s asset purchase programmes by including EGBs on 22 January, which is our baseline scenario. Inflation entered negative territory in December and is likely to stay negative for a few months before a weaker euro improves the inflation and growth outlook.

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EU: Triple-Bs? Yes please!

By Suki Mann and Thibault Colle (UBS) | We effectively have four-weeks of business left in 2014 and the path is clear for corporate bond markets to record some more upside in performance. That isn’t as welcome as it might at first look. Because we do actually need something for next year. We’re already sitting on excellent returns for 2014 of 7.7% in IG and 5.6% in HY; and with that, record low yields in IG (1.42%) and spread levels not seen since before the crisis (iBoxx IG at B+101bp). Supply in HY is at a record level (€72bn YTD) and we now have the second best year for issuance ever in IG non-financials (€201.6bn) after Tuesday’s deals from BskyB and RCI are accounted for.

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Italy or France will have to face deep structural reforms

MADRID | The Corner | Markets were sad on Monday until Mario Draghi emerged and spoke his magic words. It seems markets feel more secure every time the president of the ECB takes the lead and assures everything will be alright. Investors felt more confident after his intervention at the European Parliament’s Economic and Financial Committee. However, despite his speech regarding new potential actions in monetary policy, he also highlighted the need of deep structural reforms by the Members States. According to market watchers at Link Securities, sooner or later, “such reforms will have to be faced by Italy or France’s government, because it is necessary to make them competitive and able to grow again.”

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Eurozone crisis: “Everybody´s talking” (except about money)

SAO PAULO | By Marcus Nunes via Historinhas | In “What caused the great recession in the Eurozone? What could have avoided it?” Philippe Martin and Thomas Philippon begin thus: There is a wide disagreement about the nature and cause of the Eurozone crisis. Some see it as driven by fiscal indiscipline, some emphasise excessive private leverage, while others focus on external imbalances, sudden stops, or competitiveness divergence due to fixed exchange rates, as the following quotes illustrate.

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Daniele Nouy: “We are ready to assume EU banking supervision”

BRUSSELS | By Alexandre Mato | The head of the ECB’s financial watchdog, Daniele Nouy, asserted her belief before EU legislators that entities will arise stronger in the near future. Moreover, on the eve of the Single Supervisory Mechanism taking control of financial supervision, the French official expects that most of the capital shortfall will be filled by an influx of fresh private money.

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A significant step forward in the global fight against tax evasion

BERLIN | By Alberto Lozano | While European media focus their attention on  low inflation across Europe, concerns about the budgets of France and Italy, as well as the  need for investment in Germany, more than 50 countries are about to take a crucial step in the fight against tax avoidance: the signing of the Multilateral Competent Authority Agreement on implementing a new international standard in the automatic exchange of information (AEOI).

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There, but for the grace of ECB, go spreads

LONDON | By Soren Willemann at Barclays | Credit spreads (here, iTraxx Main) have a strong relationship to the ZEW survey of eurozone expectations for economic growth (Figure 1) over long time horizons. In the past months, however, this relationship has shown a significant disconnect: the ZEW survey reveals a material worsening of sentiment, whereas credit spreads have been largely unchanged.

IN DEPTH: Is low inflation the greatest problem for the European economy?

MADRID | By J. L. Martínez Campuzano (Citi) | I beg your pardon, I meant to say “persistently low” inflation. If it is not (and here we are in agreement), then why is the ECB repeating the same argument over and over to justify its decisions? Non-existent official rates, negative deposit rates, unlimited liquidity provision for banks, and the latest invention: the purchase of securitised corporate paper for credit operations.