Tax Rules, Slowdown Signal European Monetary Collapse

Stricter rules on U.S. corporate tax dodging combined with weak European manufacturing data to cause European stocks to slide.

Economists expect the European Central Bank to double down on its asset-buying purchasing program in the short term as weak growth threatens the eurozone. Negative interest rates on European bank holdings have not been enough to encourage greater lending that in turn would encourage greater private sector growth. 

Stricter rules on U.S. corporate tax dodging combined with weak European manufacturing data to cause European stocks to slide.

Economists expect the European Central Bank to double down on its asset-buying purchasing program in the short term as weak growth threatens the eurozone. Negative interest rates on European bank holdings have not been enough to encourage greater lending that in turn would encourage greater private sector growth. 

France, Germany, and Italy have recently indicated that their economies might endure a long-term recession, while the UK more recently announced a broader budget deficit despite assurances of broad cost-cutting by slashing public services.

European Manufacturing Slows

The European Purchasing Managers Index for manufacturing fell to 50.5, a 14-month low as the services PMI fell to 52.8. In its report, Markit Economics said a reading of 50 “signals stagnation”. 

Factory prices fell for the first time since April, and employment was unchanged. Germany saw stronger growth than the rest of the eurozone thanks to services, but its manufacturing sector saw the weakest expansion since July 2013. France continues to see negative growth.

“The survey paints a picture of ongoing malaise in the eurozone economy. With growth of output and demand slowing, employment once again failed to show any meaningful increase. Such torpor meant prices continued to fall as firms fought for customers, which will inevitably heighten concerns that the region is facing deflation,” said Chris Williamson, Chief Economist at Markit.

Draghi Sees More Active ECB

In light of weakness in the eurozone and continued instability from tensions with Russia, Mario Draghi has publicly stayed he expects a more aggressive stance from the ECB to bring Europe back to growth. At the same time, falling M&A activity from U.S. corporations looking to take advantage of tax inversions could exacerbate falling asset values in Europe, making the need for more activity from the ECB essential.

“Unacceptably high unemployment and continued weak credit growth are likely to curb the strength of the recovery. The risks surrounding the expected expansion are clearly on the downside,” said Draghi to European lawmakers, many of whom have resisted any form of asset-purchasing or aggressive monetary expansion policy from the ECB.

Chris Williamson of Markit believes that quantitative easing, while becoming a greater necessity, may prove ineffective against fierce headwinds from Ukraine and a European-wide inability to grow. “Concerns about the Ukraine crisis, related Russian sanctions and worries about the single currency area’s general economic plight appear to be having an increased impact on the eurozone economy. The danger is that the ECB’s efforts to stimulate the economy will prove ineffective in the face of such headwinds, which are exacerbating already-weak demand,” said Williamson.

UK Deficit, Strong Dollar Pressure Pound, Euro

The UK surprised markets by announcing 45.4 billion pounds of net borrowing between April and August 2014, up nearly 4% from the prior year.

Previously seen as a darling of the eurozone thanks to successful austerity and a return to growth, the UK surprised lawmakers and analysts by announcing that the government’s budget deficit grew in early 2014, despite assurances from Chancellor George Osborne that the British government would cut spending broadly.

While a weakening pound relative to the U.S. dollar has prompted some analysts to see accelerating growth from British exports, that trend has failed to materialize.

Meanwhile, the euro continues to slide relative to the dollar, falling below $1.29 amid expectations of greater economic troubles for the eurozone.