Europe: Facing the future

Europe has some big and complex issues to address, not just in the next five years, but in the next five months. Here are a few of them.

Can Germany, the eurozone’s engine of economic growth, keep up the pace of expansion, or will weaker demand from regional customers slow even this powerhouse? Should sovereign bonds lose their status as riskfree assets? Will the European Central Bank (ECB) finally be allowed to act openly as a lender of last resort for European issuers?

Takeup of the first bond issue from the European Financial Stability Facility (EFSF) was solid, proving, say its proponents, its status as a credible supranational issuer. But how much more appetite remains for this paper?

Sovereign bond auctions have indicated there is still interest in short term paper, albeit at higher prices than before. But that support drops away rapidly at the ten year mark. What do issuers have to do to convince the market of positive longer term prospects?

How long will other eurozone nations allow Germany to benefit from the weaker euro, while demanding austerity measures from other members? Will Greece exit the eurozone? If so, how will it be managed? If not, how can it continue? Will private institutional investors accept further ‘haircuts’ on their holdings of government debt, or has this particular lever already been pulled, to little effect?

According to the European Banking Authority, European banks need to find over €150bn in extra capital reserves this year. How are these banks going to do this? Will governments bail out faltering national banks?

Will key eurozone nations lose their AAA credit rating, and what are the likely consequences? Will governments move against the global ratings agencies if they believe they are politically biased?

Exports to higher growth emerging markets are regarded as one way out of recession for Europe’s corporates. But can contagion from the eurozone debt crisis be contained?

In Switzerland the central bank’s cap of the appreciating Swiss franc against the euro at a rate of 1.20 has held so far. But is this level set to be tested in coming months, and how will that affect the Swiss economy?

Nordic investors have so far managed to avoid the worst volatility associated with the urozone crisis. Both currencies and bond markets have remained well supported. But what appetite will these markets have for new panEuropean measures planned?

Unemployment levels continue to rise across the whole region, except for Germany. How are governments going to reconcile their austerity measures with this growing social pressure?

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