EMU’s quagmire seems to make the Anglo-Saxon economies shine brighter than fits reality, which might also be one factor behind the USD’s (14%) and GBP’s (12%) appreciation vs. the EUR since last July. UK GDP fell an unexpected 0.7% (qoq) in Q2; US GDP expanded a minuscule 1.5% (qoq, ann) – a far cry from what markets estimated just a few weeks ago.
While EMU countries regularly get their knuckles rapped for their economic policy one might paint a different picture. The OECD says this year’s structural public deficit will shrink by a good 1 ½ pp in EMU to stand at 1 ½% of GDP. By contrast, structural deficits, while also falling by around 1pp, are still at around 6% in the US and almost 7% in the UK. The Fed and the BoE are financing their governments by printing money on a scale way beyond any indirect effects of the ECB’s vLTROs, a potentially dangerous policy according to most economic textbooks. Yet, judging by employment rates – given that providing jobs is a major policy aim – the decline in the euro area (-1.7% in Q1 2012 vs. 2007 average) was slightly less than in the UK (-2.0%, latest data Q4 2011) and not even half the fall in the US (-4.5%). So far, however, this precarious situation has not left its imprint on the exchange and interest rates of the Anglo-Saxon economies. This is a rather simple comparison, but it might help to reconsider some cut-and-dried opinions.
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Published with kind permission of Deutsche Bank Research.