International government
What a way to run the world
Global institutions are an outdated muddle; the rise of Asia makes their reform a priority for the West
CLUBS are all too often full of people prattling on about things they no longer know about. On July 7th the leaders of the group that allegedly runs the world—the G7 democracies plus Russia—gather in Japan to review the world economy. But what is the point of their discussing the oil price without Saudi Arabia, the world’s biggest producer? Or waffling about the dollar without China, which holds so many American Treasury bills? Or slapping sanctions on Robert Mugabe, with no African present? Or talking about global warming, AIDS or inflation without anybody from the emerging world? Cigar smoke and ignorance are in the air.
The G8 is not the only global club that looks old and impotent (see article). The UN Security Council has told Iran to stop enriching uranium, without much effect. The nuclear non-proliferation regime is in tatters. The International Monetary Fund (IMF), the fireman in previous financial crises, has been a bystander during the credit crunch. The World Trade Organisation’s Doha round is stuck. Of course, some bodies, such as the venerable Bank for International Settlements (see article), still do a fine job. But as global problems proliferate and information whips round the world ever faster, the organisational response looks ever shabbier, slower and feebler. The world’s governing bodies need to change.
Time for a cull?
There has always been an excuse for putting off reform. For a long time it was the cold war; more recently, “the unipolar moment” convinced neoconservatives that America could run things alone. But now calls for change are coming thick and fast. Britain’s prime minister, Gordon Brown, and America’s treasury secretary, Hank Paulson, want to redesign global financial regulation. Others are looking at starting afresh: John McCain is promoting a League of Democracies, while Asian countries are setting up clubs of their own—there is even talk of an Asian Union to match the European one. And many critics, especially in America, want a cull. Surely economic progress in the emerging world argues for getting rid of the World Bank? Is a divided Security Council really any use?
The critics are right to argue that global organisations should be more focused than they are, but wrong to assume they can be dispensed with altogether. Get rid of the Security Council or the World Bank and the clamour to invent something similar would begin: you need somebody to boss around 100,000 peacekeepers and to lend to countries that find it hard to access capital markets. International talking-shops and standard-setters are here to stay; instead of trying to bin them, focus on making them work well.
That means recognising how economics has changed the world order. Emerging economies now account for more than half of global growth. The most powerful among them need to be given a bigger say in international institutions—unless of course you think India will always be happy outside the Security Council and China content to have a smaller voting share than the Benelux countries do at the IMF.
Any solution must accept three constraints. First, better institutions will not solve intractable problems. A larger G8 will not automatically lick inflation, a better World Food Programme would not stop hunger. Second, no matter how you reform the clubs’ membership rules, somebody somewhere will feel left out. Third, you cannot start again. In 1945 the UN’s founders had a clean slate to write upon, because everything had been destroyed. The modern age does not have that dubious luxury, so must build on what already exists.
Take for instance the G8. Some dream of reducing it to just the economic superpowers: the United States, the EU, China and Japan. An appealing idea, but Silvio Berlusconi and Vladimir Putin are unlikely to give up their seats at the top table. Better to enlarge the current body to include the world’s biggest dozen economies. A G12 would bring India, Brazil, China and Spain into the club, while allowing Canada (just) to stay in.
The politics of the Security Council are even more outdated. Nobody now would give France or Britain a permanent veto, but neither wants to give up that right. Meanwhile, the four obvious candidates are held back by regional jealousies: India by Pakistan; Brazil by Argentina; Germany by Italy; and Japan by China. The most sensible plan gives these four permanent but non-veto-wielding seats, with two other seats provided for Islamic countries and one for an African nation.
America has yet to get behind these proposals, but a sharpened Security Council could mitigate the emerging world’s objections to UN reform. With a more representative high command, more jobs could be allocated on merit, the globocracy slimmed and bolder steps considered: for instance, the case for a small standing army, or earmarked forces, to nip Darfur-style catastrophes in the bud, would be easier to make.
The Bretton Woods duo are easier to change: all that is needed is Western will. Their problem is finding a useful purpose. The World Bank is still needed as a donor to the really poor and as a supporter of global public goods, such as climate-change projects. There is less obvious need for the IMF, which was originally set up to monitor exchange rates. It could become a committee of oversight, but the main financial regulation will stay at the national level.
League of Good Hope
Supporters of Mr McCain’s League of Democracies suggest it could be like NATO—a useful democratic subcommittee in the global club. But Mr McCain needs to define his democracies. (Will Malaysia count? How about Russia or Iran?) And, crucially, any league must not be seen as an alternative to reforming the UN. The whole point of global talking-shops is that they include everybody, not just your friends.
Faced with the need to reform international institutions, the rich world—and America in particular—has a choice. Cling to power, and China and India will form their own clubs, focused on their own interests and problems. Cede power and bind them in, and interests and problems are shared. Now that would be a decent way to run a world.
The presidential election
White men can vote
And there are a lot of them, even if they can’t dance
IN A family restaurant with bottomless coffee, Paul Radaker chews on a battered fish. A retired carpenter, he has been a Democrat all his life. But this year, he is leaning towards John McCain. The Republican candidate is a war hero, he observes. Barack Obama may be intelligent, but “I don’t really know what he stands for.”
Mr Obama’s race “doesn’t bother me at all”, says Mr Radaker. The question sparks an anecdote about the Korean war. The southern guys Mr Radaker met when he served there “really didn’t like blacks,” he recalls, “But I guess that’s changed now.” Still, he reckons that plenty of people round here will not vote for Mr Obama because of his colour.
Mr Radaker is white and 78. A few miles away, John McCain is taking questions from workers in a car factory, who are mostly white men too, but much younger. The car industry in the rustbelt is miserable. Factories making thirsty pickup trucks are cutting back or closing. But the General Motors plant at Lordstown is doing just fine. It makes a small car, the Chevy Cobalt, which sips petrol in moderation and is therefore selling well. Mr McCain is touting this, along with GM’s plans for a plug-in hybrid car, as evidence that American ingenuity can solve a lot of problems, from high petrol prices to global warming. He has trouble remembering the names of the cars he has just seen being made, but he thinks they look great.
The workers are polite, but hardly ecstatic. Many are socially conservative, but pocketbook issues trouble them more. “I’m undecided,” says Matt Cope, a 34-year-old assembler who hunts and prays like a Republican but thinks the Democrats are more focused on workers. “John McCain has suffered a lot [he was tortured by the North Vietnamese]. He’s a good man. But Obama’s a stand-up guy, too.”
Guys like Mr Cope could decide the election. According to the polls, Mr Obama beats Mr McCain in nearly every group except white men. Unfortunately for Mr Obama, there are a lot of white men. In 2004 they were roughly 36% of the electorate, and they preferred George Bush to John Kerry by about 25 points. This year, Mr McCain leads Mr Obama by about 20 points among them.
Democrats have various theories about why white men do not like them. One is that the problem is only with southerners, who abandoned the Democrats in the 1960s because President Lyndon Johnson signed laws demanding equal rights for blacks. Clearly, there is some truth to this. But it is not the whole story. For one thing, the Democrats lost many non-southern white men, too. Between the presidential elections of 1960 and 2004, their share of the southern white male vote shrank by 17 points, but among non-southern whites it still shrank by 12 points. And racial attitudes have changed dramatically since the 1960s, especially among the young. There must be something besides bigotry making white men spurn the Democrats.
Thomas Frank, the author of “What’s the Matter with Kansas?”, thinks the white working class has been hoodwinked. It is in their economic interest to vote Democratic, but they don’t because those crafty Republicans have got them all worked up about silly moral and cultural issues such as abortion, guns and gay marriage.
Both theories are popular among Democrats, not least because they imply that Democrats have done nothing wrong; it is just that poor white trash are too bigoted or stupid to support them. But Democrats will not get very far by blaming the voter. David Paul Kuhn, author of “The Neglected Voter: White Men and the Democratic Dilemma” points out that moral issues cannot easily be separated from economic ones. Poor people fret more about family breakdown because they see more of it than rich people do and its consequences, for them, are worse.
In a time of economic insecurity, it is rational for people to turn to things they can rely on, such as faith and patriotism, and unwise for Democrats to scorn them for it. That is why Mr Obama’s comment that people in small towns “cling to guns or religion or antipathy to people who aren’t like them” because they are “bitter” will be the keystone of Republican attacks, predicts Mr Kuhn.
Mr Kuhn thinks the Democrats’ failure to take white men seriously is the main reason they keep losing presidential elections. The party captures liberal white men—typically prosperous professionals—but scores badly among businessmen and white male workers. Part of the problem is that Democrats are identified with the notion that white men are to blame for all the world’s ills, from racism to the oppression of the workers. Few white men share this view. Many are workers themselves.
The Republicans have long been better at presenting themselves as the Daddy party, self-reliant, tough on crime and tough on terrorists. “They talk male talk,” grumbled the late Norman Mailer, a novelist who thought liberals could be macho too. The Democrats, meanwhile, strike some white men as effete, cosmopolitan and condescending. Mr Obama’s waffly explanation as to why he temporarily stopped wearing a flag pin sounded awfully as though he thought those who love the flag are frauds and dolts.
In some voters’ minds, Democrats are associated with an assault on masculinity itself. “Boys can’t be boys in school any more,” complains Karen Combs, a volunteer for Mr McCain. And urban liberals don’t understand how much guns matter to rural white men, fumes Dave “Mudcat” Saunders, a Democratic strategist. “Someone’s talking about taking your guns, they’re talking about coming inside your fence,” he says. “And government should stop at your fence.”
If the Democrats paid more attention to “Bubba” (the white male rural voter), they could get a lock on the presidency for 30 years, predicts Mr Saunders, with the hyperbole common to his trade. The first step is showing up: “If you live in Kentucky or West Virginia and you read in the local paper about a candidate who isn’t coming ’cause he thinks you won’t vote for him, you won’t vote for him.”
Mr Obama seems to understand this, and is striving manfully to make it up to Bubba. He has reversed his old view that the gun ban in Washington, DC, (which the Supreme Court struck down last week) was constitutional. He stresses that big cities and rural areas can have different gun laws, saying that “what works in Chicago may not work in Cheyenne”. He gave a rousing speech about patriotism on June 30th, including an anecdote about sitting on his grandfather’s shoulders watching American astronauts come to shore in Hawaii. And the next day, he gave a speech in Ohio about faith.
But he has his work cut out. The “people” section on his website divides Americans into 17 categories: Latinos, women, First Americans, environmentalists, lesbian, gay, bisexual and transgendered people, Americans with disabilities, Asian-Americans and Pacific islanders and so on. There is no mention of whites, or men.
The oil price
Don’t blame the speculators
Politicians who try to make oil cheaper by restraining speculation will just make things worse
ALTHOUGH the price of oil continues to hit new records, it has in one respect been a quiet week on the oil markets. America’s lawmakers are celebrating Independence Day by taking a few days off. That has led to a brief interruption in the torrent of proposals aimed at curbing speculation.
Ten different bills on the subject are in the works in Congress. Before the House of Representatives shut up shop, it approved one by a vote of 402-19. America’s politicians are not the only ones to have fingered speculators for the feverish rise in the price of oil and other raw materials. Italy’s finance minister believes that there is a “magnum of speculative champagne” included in the price of each barrel. Austria wants the European Union to impose a tax on speculation. Saudi Arabia and other big oil producers routinely blame the price on frothy markets, rather than idle wells.
The accusers point to the link between the volume of transactions on the futures markets and the price of oil. Since 2004 the near tripling of trading in oil on the New York Mercantile Exchange (NYMEX), the world’s biggest market for the stuff, has neatly coincided with a tripling in the price.
What is more, investing in oil has become something of a fad. Commodities traders and hedge funds with long experience have been joined by less expert sorts, including pension funds and individuals. All this, the theory runs, is contributing to a bubble in commodities. The rush of punters betting on higher prices is begetting a self-fulfilling prophecy: it is the tide of new investment, rather than inadequate supply or irrepressible demand, that is pushing the price of oil ever higher.
Follow the oil, not the futures
This reasoning holds obvious appeal for those looking for a scapegoat. But there is little evidence to support it. For one thing, the surge in investment in oil futures is not that large relative to the global trade in oil. Barclays Capital, an investment bank, calculates that “index funds”, which have especially exercised the politicians because they always bet on rising prices, account for only 12% of the outstanding contracts on NYMEX and have a value equivalent to just 2% of the world’s yearly oil consumption.
More importantly, neither index funds nor other speculators ever buy any physical oil. Instead, they buy futures and options which they settle with a cash payment when they fall due. In essence, these are bets on which way the oil price will move. Since the real currency of such contracts is cash, rather than barrels of crude, there is no limit to the number of bets that can be made. And since no oil is ever held back from the market, these bets do not affect the price of oil any more than bets on a football match affect the result.
The market for nickel provides a good illustration of this. Speculative investment in the metal has been growing steadily over the past year, yet its price has fallen by half. By the same token, the prices of several commodities that are not traded on any exchanges, such as iron ore and rice, have been rising almost as fast as that of oil.
Speculators do play an important role in setting the price of oil and other raw materials. But they do so based on their expectations of future trends in supply and demand, not on whims. If they had somehow managed to push prices to unjustified heights, then demand would contract, leaving unsold pools of oil.
The futures market does sometimes signal that prices are likely to rise, which might prompt speculators to hoard oil in anticipation. But it is not signalling that at the moment, and there is no sign of hoarding. In the absence of rising stocks, it is hard to argue that the oil markets have lost their grip on reality.
Some claim that oil producers are in effect hoarding oil below the ground. But there is also little sign of that, either among companies or countries: all big exporters bar Saudi Arabia are pumping as fast as they can.
It takes two to contango
Despite their dismal reputation, the oil speculators provide a vital service. They help airlines and other big oil consumers to hedge against rising prices, and so to reduce risk—a massive boon amid the economic turmoil. By the same token, they provide oil producers with more predictable future revenues, and so allow them to expand more confidently and borrow more cheaply. That, in turn, should help to lower the price of oil in the long run. Any attempt to curtail speculation, by contrast, is likely to make life harder for firms and oil more expensive.
Commentary by Michael R. Sesit
July 4 (Bloomberg) -- In a case of the pot calling the kettle black, the U.S. Federal Reserve, the European Central Bank and the Bank of England are telling their developing-country counterparts to get their respective economic houses in order and do something about growing inflationary pressures.
``In those countries where strong commodity demands are associated with rapid growth in aggregate demand that outstrips potential supply, actions to contain inflation by restraining aggregate demand would contribute to global price stability,'' Fed Vice Chairman Donald Kohn said last week.
China is growing at an annualized 10.6 percent; India is chugging along at 8.8 percent; and Taiwan's gross domestic product is expanding 6.1 percent, while the economies of Thailand, Malaysia, Singapore and Hong Kong are advancing between 6 percent and 7.1 percent a year.
No doubt, this fast growth is contributing to global inflation. Food and energy prices, which account for a much bigger share of developing-country consumer spending than in industrialized nations, are soaring. Crude oil for future delivery climbed to a record $1.4585 on July 3, while corn futures reached a record $7.99 a bushel on June 27.
Developing countries are notoriously inefficient users of energy, and many subsidize gasoline and other commodities, preventing higher prices from deterring consumption.
`Totally Unsuited'
What's more, many Asian countries pursue export-oriented growth strategies, a key feature of which involves directly or indirectly linking their currencies to the dollar. Because oil is priced in dollars, Middle East petroleum exporters do likewise.
``By maintaining too tight a peg to the dollar, some countries are led to largely `import' the U.S. monetary policy, which is often totally unsuited to their economic situation,'' said Christian Noyer, the Bank of France's governor and a member of the ECB's governing council. ``This situation may result in inflationary pressures that are difficult to contain, which then tend to spread to the rest of the world.''
Bank of England Governor Mervyn King added that ``monetary policy looks, on average, a little lax'' around the world.
Still, look at who is doing the lecturing. After cutting its key federal-funds rate seven times in as many months, the Fed finds itself battling 4.2 percent inflation with a 2 percent benchmark interest rate.
The ECB yesterday increased its benchmark lending rate a quarter-point to 4.25 percent. Even so, it had kept that rate at 4 percent for 13 months, while inflation in the 15-country euro area accelerated from 1.9 percent to 4 percent, a 16-year high.
Meanwhile, King last month wrote a letter to Chancellor of the Exchequer Alistair Darling, saying the U.K.'s 3.3 percent inflation rate -- already above the bank's 2 percent target -- was headed for 4 percent.
Maybe the big boys should learn that responsibility, like charity, begins at home.
* * *
Global status used to be a national airline. Now every country wants a stock market and world-class financial center.
In the race to become the Middle East's New York, Qatar's Doha Securities Market gained a partner in the battle with its two main competitors -- Dubai and Bahrain -- by agreeing late last month to sell a 25 percent stake to NYSE Euronext for $250 million. The proposed investment will also leave Qatar well- positioned to compete with other regional aspirants, such as Saudi Arabia, Kuwait, Oman and Abu Dhabi.
Saudi Arabia's stock-market value equals $476 billion, followed by the U.A.E. at $219 billion, Kuwait at $209 billion, Qatar at $120 billion, Bahrain at $31 billion and Oman at $28 billion, according to data compiled by Bloomberg.
The stock markets' free-floats -- that which is available for purchase and not held by governments, families, foundations and other companies -- are much smaller, though. Saudi's adjusted free-float is $144 billion, Kuwait's $66 billion, the U.A.E.'s $34 billion, Qatar's $15 billion, Bahrain's 5 billion and Oman's $7 billion, according to Morgan Stanley Capital International.
Preparing for the day the oil and gas runs out is important. Even so, regardless of its wealth, the Middle East needs only one major financial hub.
* * *
During the past two decades, the U.S. has repealed legislation that barred interstate banking, separated commercial and investment banking, and split lenders and insurers.
The result was the emergence of big financial conglomerates with an increasingly complex makeup as banks, securities firms and insurers entered each other's business.
Two Concerns
``We need to create a resolution process that ensures the financial system can withstand the failure of a large, complex financial firm,'' Treasury Secretary Henry Paulson said in a speech in London this week.
``Two concerns underpin expectations of regulatory intervention to prevent a failure,'' he said. ``They are that an institution may be too interconnected to fail or too big to fail. We must take steps to reduce the perception that this is so -- and that requires that we reduce the likelihood that it is so.''
Paulson is right. The challenge, though, is that the horse has already left the barn. Citigroup Inc. used to take deposits and make loans. Now it also has an investment bank, an insurance company and an asset-management arm. JPMorgan Chase & Co. is the product of at least six money-center bank mergers and several smaller institutions.
With banks already lobbying for no change, and regulatory turf battles to be expected, enlightened legislation may be too much to hope for.
Commentary by William Pesek
July 4 (Bloomberg) -- If a country wanted to boost innovation and competitiveness, it could do worse than pick the brain of Nobuyuki Idei.
The former Sony Corp. chief executive officer has no such formal role in Japan, nor does he want it. And at 70, Idei might not seem the most natural bridge between Japan's rigid business culture and its technological future. Would the dot-com set in the U.S. listen to a septuagenarian -- a man more of Jack Welch's generation than that of Google Inc.'s founders?
Yet in seniority-based Tokyo, it takes someone with Idei's gravitas to create a consulting company called Quantum Leaps Corp. and be taken seriously in shaking up Japan.
Sure, Sony has lost its groove and eaten Apple Inc.'s dust. Idei presided over the ``Sony Shock'' in April 2003, when shares fell 27 percent in two days. His 10-year stint at the world's second-largest maker of consumer electronics ended in 2005.
Ups and downs aside, it's hard to exaggerate Sony's role in the Japanese psyche. What many Americans feel about Henry Ford or Bill Gates, Japanese think of Sony founders Masaru Ibuka and Akio Morita. The company they created in 1946 was emblematic of Japan's post-World War II rise.
Idei is still a bit of a rock star in Japan. He can hobnob with prime ministers, mingle with the Davos set, dine with celebrities, deliver advice around the globe and sit on the boards of companies such as Accenture Ltd. and Baidu.com Inc. And then he returns to his Tokyo office to think the big thoughts about what Japan needs to do to compete globally.
Quantum Leap
``Japan needs a quantum leap,'' Idei says, shedding light on how he arrived at the name of his two-year-old company. ``Japan is a symbol of success in the last century, but it's still in a 1990s-like stage -- before the Internet became a big force.''
Strong words, and ones Japan bulls may not want to hear. Yet Idei's views are more about tough love than gratuitous criticism.
Now that Sony is Howard Stringer's problem, Idei is setting his sights on Japan. He aims to light an innovative fire under the nation's 127 million people to produce new industries that create jobs and raise Japan's competitiveness.
It's quite a paradox. Japan is often named the most innovative nation based on its high number of patents. Most are concentrated in huge companies, and many are incremental improvements to existing inventions.
Steve Jobs Wannabes
What Japan lacks is a bunch of sleep-deprived, caffeine- driven Steve Jobs wannabes perched over laptops around the nation. While things are changing, Japan is still too much about centralizing innovation in corporate behemoths and not enough about scrappy startups. It explains why neither Google nor Yahoo! Inc. happened in Japan.
Idei's work is worth keeping an eye on. His focus is on breaking down the social barriers in a region whose venture- capital industry is a fraction of the U.S.'s. That vision will get the attention it deserves next week in the western Japanese city of Fukuoka, where Idei is organizing the second annual Asia Innovation Initiative.
It's a pan-Asian effort to brainstorm about ways to cultivate new entrepreneurial ventures. Asia is still a region where risk-taking is often championed less than in the West and financing for new ideas can be hard to come by.
The event also will highlight overlooked investment opportunities in Asia and a sizeable contingent from the cash- rich Middle East is expected to attend. Idei is an adviser to Dubai International Capital LLC.
Urgent Situation
Asia's situation is becoming more urgent amid rising commodity costs. If economists such as Jeffrey Rubin of CIBC World Markets Inc. in Toronto are right, Asia's future as an exporting powerhouse is in jeopardy as crude oil heads toward $200 a barrel. As rising transport costs are making imports more expensive, Rubin expects U.S. production to move away from Asia and closer to home.
Asia's best hope for prosperity is technology and innovation. We are looking at a global environment in which cost changes in the old economy are providing greater urgency for Asia to embrace new-economy opportunities, Idei says.
``This is a very important time for Asia to collaborate,'' he says.
In Japan, Idei is pushing his private-sector peers to replace the seniority-based system with a true meritocracy and to accelerate consolidation in bloated industries. He is striving to boost funding for startups that can create high-paying jobs and increase competition. The simplest explanation for what Idei is driving at is a Japanese Silicon Valley.
The Liberal Democratic Party has run Japan for all but one year since 1955. Its economic model is low interest rates, massive government borrowings and a weak yen. Pressure to alter the tax system in favor of entrepreneurs and new business creation will have to come from the private sector.
It's not the kind of role you would expect from an elder statesman of the business world like Idei. Any effort that accelerates Asia's path into the future is well worth the energy.
July 4 (Bloomberg) -- German manufacturing orders unexpectedly declined for a sixth straight month in May, further evidence that Europe's largest economy is losing momentum.
Orders, adjusted for seasonal swings and inflation, fell 0.9 percent from April, the Economy Ministry in Berlin said today. Economists expected a gain of 0.8 percent, according to the median of 37 forecasts in a Bloomberg News survey. Orders fell 2 percent from a year earlier.
German and European manufacturing growth is faltering as near-record oil prices push up inflation and damp the spending power of companies and households just as a strong euro weighs on exports. The European Central Bank raised interest rates yesterday to a seven-year high to combat the threat of an inflation spiral.
``The boom is well and truly over,'' said Matthias Rubisch, an economist at Commerzbank AG in Frankfurt. ``Now we'll have to pray the economy doesn't go in the other direction.''
The last time orders fell for five consecutive months or more was in 1992. The German economy shrank the following year.
May is the fourth month in a row that orders defied economists' expectations of an increase. In April, sales fell 1.7 percent, the ministry said, revising its previous forecast of a 1.8 percent drop.
European Gains
Domestic orders dropped 2.7 percent in May while foreign sales gained 0.8 percent. Orders from other euro-area countries increased 3.4 percent and demand from the rest of the world fell 1.2 percent in the month.
The euro has gained 15 percent against the dollar and 17 percent against sterling over the past year and the price of oil has more than doubled in that time to more than $145 a barrel.
Volkswagen AG, Europe's largest automaker, said June 20 sales of VW-brand cars declined in May as higher fuel prices discouraged buyers. Heidelberger Druckmaschinen AG, the world's largest printing-press maker, has forecast a ``significant'' drop in annual profit, citing slowing demand and the stronger euro.
Order growth over the past six months has ``cooled significantly,'' the ministry said in the statement. ``Overall it points to weaker developments in industrial production.''
``The cost shock from oil and other commodities is really biting,'' said Laurent Bilke, an economist at Lehman Brothers International in London. ``It will also affect orders from markets, like emerging economies, that have so far remained fairly resilient. The outlook is deteriorating further.''
Inflation High
Inflation in the 15-nation euro area accelerated to a 16- year high of 4 percent last month. In Germany, which accounts for about a third of the region's economy, annual price gains reached 3.4 percent, the fastest since records began. The ECB aims to keep inflation just below 2 percent.
ECB Governing Council member Juergen Stark said June 26 that higher oil prices will leave a ``significant'' mark on the euro- area economy. Last month, manufacturing in the 15 nations in the region contracted, a survey of purchasing managers showed July 1. Industrial production in Spain fell the most in six years in May, a report today showed.
``I don't think that yesterday's increase in interest rates will hurt the economy,'' ECB council member Klaus Liebscher said today. Policy makers in Frankfurt yesterday raised the benchmark lending rate by 25 basis points to 4.25 percent.
Losing Momentum
Today's report is the latest to signal that Germany's economy, which so far has coped, is losing its momentum.
German consumer, business and investor confidence fell last month. Plant and machinery orders dropped the most in three years in May, the VDMA machine makers association said this week.
Europe's largest economy may shrink in the second quarter after having expanded at the fastest pace in 12 years in the first three months of the year, Germany's Deputy Economy Minister Walther Otremba said June 24.
Not all German companies are suffering, though. Siemens AG, Europe's largest engineering company, said July 1 that it has a ``record'' order backlog at its energy division. Other companies pass on higher costs. BASF SE, the world's biggest chemical maker, last month said it will increase prices by as much as 20 percent because of higher raw-material, energy and freight costs.
Still, the price of oil is likely to continue its ascent next year and economic growth to be cut in half, Germany's IMK economic research institute said June 26. IMK forecasts Germany's economy will grow 0.9 percent in 2009 after expanding 1.8 percent this year. Economic growth peaked in 2006 at 2.9 percent.
July 5 (Bloomberg) -- European stocks fell for a fifth week, completing the longest losing streak since January, as concern deepened that record oil prices and slowing economic growth will hurt profits.
ArcelorMittal, the world's largest steelmaker, and Lonmin Plc paced a retreat in basic-resources companies, sending a measure for the industry to its worst week in more than two months. TUI Travel Plc, Europe's largest tour operator, and Iberia Lineas Aereas de Espana SA slipped as oil rose above $145 a barrel for the first time. Marks & Spencer Group Plc, suffering from a slump in U.K. consumer spending, led retail stocks lower after reporting the steepest sales decline since 2005.
Europe's Dow Jones Stoxx 600 Index sank 2.7 percent to 279.53. Stocks have retreated worldwide this year, erasing almost $11 trillion from global equity markets, on concern credit- related losses topping $400 billion, record oil and accelerating inflation will force central banks to raise borrowing costs.
``Inflation continues to weigh on markets, clouding the outlook for earnings and economic growth,'' said Christoph Berger, who helps oversee almost $100 billion as a fund manager at Cominvest Asset Management in Frankfurt. ``Economic headwinds bear risks for the market.''
European Central Bank President Jean-Claude Trichet played down prospects of higher interest rates, saying the quarter-point rise to 4.25 percent on July 3 will help bring inflation back below 2 percent. Trichet said he has ``no bias'' on further moves.
Crude Oil
Crude oil climbed to a record above $145 a barrel in New York on July 3. Prices have risen 2.8 percent this week and more than doubled in the past year.
National benchmarks declined in all 18 western European markets. Germany's DAX Index fell 2.3 percent, and France's CAC 40 retreated 3 percent. The U.K.'s FTSE 100 decreased 2.1 percent. The Stoxx 50 slipped 1.3 percent, and the Euro Stoxx 50, a measure for the euro region, lost 2 percent.
In the U.S., the Dow Jones Industrial Average dipped into a bear market on July 2 and the U.K.'s FTSE 100 Index briefly entered a bear market a day later.
Earnings for companies in the Stoxx 600 are expected to drop 2 percent this year, compared with 11 percent growth forecast at the end of last year, according to data compiled by Bloomberg.
``There has been a shift in the market's focus away from the credit crunch in March, towards oil and inflation,'' Bernd Meyer, head of pan-European equity strategy at Deutsche Bank AG in London, said in a Bloomberg Television interview.
ArcelorMittal
ArcelorMittal fell 16 percent and Lonmin, the world's third- biggest platinum producer, retreated 15 percent. The Stoxx Basic Resource Index sank 8.5 percent, the steepest drop since the week ended March 21 and the worst performance among 18 industry groups.
ArcelorMittal said July 1 that about half its U.S. customers refused to pay a $250-a-ton surcharge that was added in May to make up for soaring raw-material costs.
Eramet SA, operator of the world's largest ferronickel plant, plunged 19 percent. Challenges magazine reported July 3 the Duval family, its main shareholder, has been selling shares.
TUI Travel sank 13 percent and Iberia, Spain's largest airline, tumbled 22 percent. Thomas Cook Group Plc, Europe's second-biggest travel company, fell 11 percent, and Air France- KLM Group, the largest European airline, slipped 8.3 percent.
Jet-fuel prices in northwest Europe increased 5.3 percent this week, bringing the advance in 2008 to 59 percent, Bloomberg data show.
Marks & Spencer
Marks & Spencer fell 32 percent this week. Sales at U.K. outlets open at least a year slid 5.3 percent in the 13 weeks ended June 28. A 4.5 percent decline in same-store sales of food was the biggest drop since at least 1998. Marks & Spencer lost market share in food after Tesco Plc and Wal-Mart Stores Inc.'s Asda reduced prices, in what Executive Chairman Stuart Rose said was ``the biggest price war we've probably had in the last 20 years.'' Conditions won't improve for two years, he said.
Kingfisher Plc, Europe's largest home-improvement retailer, slipped 13 percent. Next Plc, the third-biggest U.K. fashion retailer, decreased 10 percent.
Construction and material stocks were the second-biggest decliners in the Stoxx 600, with a measure for the industry retreating 7.1 percent.
CRH Plc dropped 6.9 percent. The world's second-biggest maker and distributor of building materials said July 2 first- half profit fell 10 percent on a weaker dollar and deteriorating markets in North America and Europe. CRH also said it will fail to post a 16th consecutive year of profit growth in 2008.
Taylor Wimpey
Analysts at Credit Suisse Group AG on July 1 cut their price estimates on stocks including CRH, Lafarge SA and Cie. de Saint-Gobain SA and advised clients not to invest in European building-materials companies for at least the next year.
Taylor Wimpey Plc slumped 49 percent, the worst-performing company in the Stoxx 600. The U.K.'s largest homebuilder failed to raise funds from investors, scrapped its first-half dividend and said Finance Director Peter Johnson resigned.
France Telecom SA, Europe's third-biggest telephone company, advanced 14 percent, while Vodafone Group Plc, the world's largest mobile-phone company, gained 7.3 percent.
Morgan Stanley upgraded European telecommunication shares to ``attractive'' from ``inline'' on July 2. A measure for the industry in the Stoxx 600 was one of only two groups to rise this week, climbing 4.8 percent.
``Defensive stocks are interesting because their performance isn't linked to economic growth,'' said Benoit de Broissia, an analyst at Richelieu Finance in Paris, which oversees $6.2 billion. ``They offer good visibility on sales. They are safe havens when the economic context is difficult.''
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