Cash In The EU Is Moving Offshore. Expect Borrowing Costs To Rise And Wheels Of Commerce To Slow Down

Adam West writes from Frankfurt: While the Eurozone has gone into hibernation, disturbing trends are emerging.

Royal Dutch Shell has just announced that it is moving its spare cash from European banks into US Treasury bonds and off shore. It regards the risks that European banks might go bust as too great to hold the $15 billion it has to spend. This is the worst possible message for the European Union that is strapped for cash.

If other companies follow Shell’s example, the European Union will find that borrowing costs will escalate. Why is this? Deposits fund lending and keep interest rates low. Remove them and the only source is the volatile inter-bank debt markets. So borrowing rates will rise. The oil major also said that the credit risk of doing business in the Eurozone was increasing. It is concerned about its suppliers not being able to get the credit they need to fulfil contracts.

Thus a chain reaction can be observed. If the large corporations are becoming more and more concerned about credit risks this will have a negative effect on those below them. It will slow down business. Whereas credit risk assessments were previously done by junior staff, senior staff have now taken over. Everyone is becoming more nervous.

The same phenomenon can be observed in cross national banking. A company in France has to rely on French banks to provide credit. If it has a large contract to export to Spain or Italy, French banks are understandably reluctant to provide the necessary finance. Letters of credit were automatically accepted a few years ago. This is no longer the case. It is now normal to demand cash up front to import goods.

Another disturbing trend is emerging. Large companies are preparing to opt out of peripheral markets. In other words, Greece, Italy, Spain and Portugal may be regarded as too volatile to do business with. Safer to produce less and export to Germany, the Netherlands, Finland and so on.

A recent survey of British companies found that more and more of them are contemplating opting out of EU markets and reverting to markets in the British Commonwealth and the United States. They find the raft of EU regulations and rules so onerous that it is not worth the effort to conform. It is now easier to trade with the US, Australia and New Zealand than the EU. About a third of those surveyed rate the disadvantages greater than the benefits of trading with EU countries. This is a terrible indictment of the single market which is supposed to promote trade. About one in eight British businesses would like the UK to leave the EU. About a half want a looser relationship with Brussels. Needless to say they are against greater EU integration.

The good news is that the EU has a current account surplus with the world. This is in stark contrast to the United States and Britain. Hence, the EU does not have to import capital to develop. The bad news is that it has a debt mountain which is slowly strangling member economies. Surely Germany is the exception to this? Well, over the last ten years German per capita income has grown 12 per cent in real terms. In Spain and Italy it is 5 per cent but in Italy per capita income has fallen. The reason? Growing differences in labour productivity. Germany is now reaping the benefits of labour reforms in 2002. This means that there is no quick fix even if France, Spain and Italy embarked on German-comparable reforms.

So make sure you enjoy your holidays this summer. When you return sun tanned you may blanch at what you find. The big boys are losing faith in Europe and moving their cash offshore. Money is leaving Spain at an accelerating rate. The same is happening elsewhere inside the Eurozone. This autumn is going to be very stormy.

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