The world continues to be transfixed by the Eurozone crisis.
Last week’s “historic” agreement is an excellent example of not wasting a good crisis in order to make changes – in this case trying to rectify the misconstruction of the Eurozone by creating a tighter fiscal union.
For the optimists, one has to believe the Eurozone has come to its senses and will resolve the flawed structure of the currency system it instituted; or agree to give in. The agreement though does not, of itself, address the key problems of sovereign debt and the associated level of banking risk – and of course different levels of national competitiveness and efficiency. Those will still be there even with closer fiscal co-ordination. Eventually something must give as many commentators have observed.
Summit after summit tries to square the circle of weaker European economies subsidising the might of the German economy which, like the Chinese Renminbi, should be operating at a higher exchange rate. Imposing austerity without growth on all the less competitive economies does not look like a fair or sustainable solution.
However the alternative is that a new Northern Eurozone currency - the ‘Neuro’ or new Deutsche Mark will break away. Were that to happen, the Neuro would be likely to appreciate too quickly, reducing the German positive balance of payment surplus and increasing the threat of unemployment in Germany. By contrast the Seuro covering the Southern indebted countries would depreciate improving their competitiveness.
This scenario is similar to the situation currently being played out in Brazil. There, the supercharged petro-investments, "BRIC" status and high interest rates imposed to cool the economy, has led to a sharp currency appreciation earlier in the year. This in turn has been followed by a sharp slowdown. GDP in the three months to the end of September this year contracted marginally, at least definitely a cooling if not a chill.
Eventually Germany will have to pay the price for dominating the Eurozone (and a subsidised currency the alternative being the falling apart of the Eurozone, with some of the consequences currently being "gamed" by the largest companies and bankers.
It is also worth remembering the British Pound’s ejection from the old ERM in 1992 led to a sustained economic recovery that lasted over a decade. Maybe leaving the Euro and joining the Seuro - would be good plan for the people in the Southern European countries. We shall see in 2012.
For normal business people the uncertainty is already beginning to take its toll. Notwithstanding the downswing of the "Bullwhip effect", which OATS has referred to several times recently, there is softness in China’s demand, base oil prices seem to be softening a time when they normally harden and lubricants producers are also anecdotally reporting reduced demand. This is exactly what one would expect in a minor downturn.
There are, however, suggestions that forecasts of recession may appear to be overdone. The US is still growing and, given that 2012 is an ‘election year’, there will be every chance given to maintaining growth and employment. Remarkably, the UK is still forecasting growth – albeit significantly smaller than previously predicted and with a number of health warnings attached – as is much of Eastern Europe.
The current situation will almost certainly be a key talking-point for the CARS 21 Sherpa Group, whose members have now agreed to adopt the interim report on the competitiveness and sustainable growth of the automotive industry in the European Union. Electro-mobility will also be high on the agenda over the next six months amongst other issues.
In the long run, these discussions impact hugely on the nature and shape of the lubricants business as cars consume less engine oil. It will not happen fast, but eight years is not far away given the scale of investments needed. The OATS Bulletin will keep you up to date with all the latest news.
The next few weeks also brings a time to draw breath, spend time with family and look with hope towards 2012 and whatever challenges it may bring. So, on behalf of everyone at OATS, I’d like to wish you a happy and stress-free Festive Season and a prosperous and successful New Year.
If you would like to find out more about OATS' lubricants database developments or offer potential content or comments, we would be delighted to hear from you. Please contact us.
Sebastian Crawshaw
Chairman