Conference on “Global economy and markets”

A one-day conference on “Global economy and markets” was held by Eurobank EFG, on March 19, 2007 at the Polis-Thessaloniki Convention Center in Thessaloniki.

This day event is part of a series of initiatives undertaken by Eurobank EFG in the framework of its efforts to contribute to public debate, on the one hand and to provide systematic and integrated information to both the Bank’s customers but also to the public about critical issues that touch on the economy, markets, society and economic policies. Eurobank EFG has successfully hosted another three such day events so far: the first dealt with the importance of the Irish growth model for the Greek economy, the second analyzed current trends in private and professional real estate markets in Greece as well as internationally and the third addressed the prospects for the Greek tourist industry.

Eurobank EFG Deputy Chief Executive Officer, Mr. Nikolaos Karamouzis,  inaugurated the day conference proceedings, talking about the role of Eurobank EFG in fostering entrepreneurship and noted that Eurobank EFG business loans issued in Greece in 2006 exceeded € 2.8 billion, overtaking the rest of the banking institutions’ respective increases. In the field of private banking, the bank is managing € 7.5 billion while its assets under management increased by € 1.2 billion in 2006. As a result thereof, Eurobank EFG is the biggest private banking asset manager in Greece. As for its activities abroad, Eurobank EFG is turning into a strong regional player with a network of 760 branches and points of sale in six countries, apart from Greece, with a view to increasing them to 1,000 by the end of 2007.

Next, Eurobank EFG Chief Economist, Mr. Gikas Hardouvelis, moderator for the day, introduced the speakers and described the content of the conference.

The first speaker was Professor Norbert Walter, Deutsche Bank Group Chief Economist and Head of Deutsche Bank Research, who described the favorable conjecture the global economy is going through and aired his views on how long this should last. According to Prof. Walter, the significant global growth in the past 4 years, the limited fluctuation of stock market indices and the low interest rates, due to low inflation rates, have all contributed to this favorable ambience. Stocks and shares are the best investment choice within this framework of low bond yields and high real estate prices. Highly interesting shares for investors ought to prove those with a low P/E (price to earnings ratio). The European market is indeed such a market according to Prof. Walter, as we have yet to see its price peaks. According to Prof. Walter, it is likely that the US economy is on course for a soft landing, accompanied by a further drop in real estate prices, growth rates falling to 1-2% as opposed to the current 3% and expectations worsening. Prof. Walter expects the US dollar to depreciate against the Euro with the latter’s considerable overvaluation impacting on European exports and thus on overall European growth prospects beyond the year 2007. The rest of the world, China and India in particular, will be minimally affected by the dollar’s depreciation as their currencies’ value will gain ground against the dollar only slightly. Prof. Walter expects the European Central Bank (ECB) to have its intervention rate rise yet once more by the end of the year to get to 4% from 3.75%. A new, additional increase is possible if growth within the Eurozone exceeds 2%.

The next speaker to take the floor was Ms. Laurence Boone, Barclays’ Capital Research Director and Chief Economist for France, who sketched economic prospects for the Eurozone. She said that annual growth rates for the Eurozone are liable to drop from 2.8% in 2006 to 2.5% in 2007. This relative weakening in economic activity is attributed to an expected decrease in corporate profits as they were the ones that helped Eurozone economic growth take off in the past by means of investment funding. Moreover, employment is expected to rise, though not in every Eurozone country, given the ever-increasing employers’ intent to hire new staff. Annual inflation rates in the Eurozone for 2007 will get to 1.9% as opposed to 2.2% in the previous year. This small drop, said Ms. Boone, is due to the inflation rates being just slightly affected by increased raw material and oil prices despite a respective increase in services’ prices. According to Ms. Boone, by the end of 2007 the ECB is bound to decide on an intervention rate rise as a result of extreme fluidity.

Matteo Ferrazzi, Economist for Unicredit, CEE Division Research, who spoke next, stressed the good prospects for growth that Central and Eastern European (CEE) countries have to offer. High and average technology products have the biggest market share in exports to the aforementioned countries. Most of the direct foreign investment to these countries actually goes into producing such products. According to Mr. Ferrazzi, CEE countries are not faced with significant competition from China as textiles, leather goods and electrical equipment account for a bigger share of Chinese exports than technological products. Matteo Ferrazzi went on to add that CEE countries are due to improve their competitiveness greatly should they capitalize on features such as domestic market size, closeness to the main European markets and their own dynamic human resources. Encouraging the setting of flexible terms to foster entrepreneurship and the setting up of European production centers could play a decisive role as well.

In his address delivered at dinner, Mr. Nicholas Nanopoulos, Eurobank EFG Group Chief Executive Officer, stressed that the global economy is no longer exclusively dependent on US growth but also on that of other countries, such as China and India, while at the same time the income of those living in such countries is gradually converging with the respective incomes in developed countries.  Mr. Nanopoulos also addressed the issue of structural reforms needed in this global environment as these reforms, along with issues pertaining to energy and the environment, are the main challenges contemporary societies are facing.

Lawrence Summers, world-renowned Harvard University Professor of Economics, former Treasury Secretary (1999-2001) during the Clinton administration and Harvard University President (2001-2006), was the keynote speaker at dinner. In his speech Professor Summers talked about how living standards have improved in less than 70 years, which is almost the average human life span, on technological progress propping globalization up, the rise of the Chinese economy and significant financial and capital market growth with the development of new products to purchase and promote financial risk management solutions. This growth results in a paradox, he said, as capital flows from the emerging markets are being channeled to more mature economies. Mr. Summers concluded that the world economy will actually be faced with three challenges in the next decade.

First, the US will go through an economic depression due to asset price instability. Such type of economic depression emanates from an increase in interest rates following a significant rise in asset pricing, this being the result of improved investment expectations. The easiness of borrowing money and the initial rise in asset prices have led to these improved investment expectations. The US faced a similar depression in the past, both before WW2 and in 2000-2001 when US hi-tec companies’ share values plummeted. Japan’s economic depression in 1997 is another such example linked to the overvaluation of real estate prices. Given this conjecture the Fed (Federal Reserve, US Central bank) is considering its two options: either increase fluidity to bring interest rates down or devaluate the US dollar to make amends for the high US current accounts deficit and thus have an interest rate increase. In the framework of this economic depression the odds for more acute problems in the market of lower mortgage credit quality in the United States are high.

The second challenge is linked with the potential widening of the income divide with the developed countries. Currently, a CEO’s salary in the States is 300 times that of an average worker while it used to be 40 times higher in the past. The middle class is worried about globalization and these concerns were both reflected in the rejection of the EU Constitutional Treaty during the recent referenda and the US Congress expressing its concerns over world trade. According to Prof. Summers, if governments fail to adopt policies to improve benefits the community could reap, then there will be social unrest. The third challenge is linked with risks that are not inherent to the financial system but which nonetheless have considerable repercussions on it, i.e. a flu pandemic.