Texas Tech University

"Bad News from Europe Could Potentially Benefit the U.S. and China" - Franco Parisi, Alexandria Lyon and Matthew Parkin

Trevor Bell

January 29, 2015

Since joining the Rawls College of Business in August 2014, Visiting International Scholar Franco Parisi has worked with students in the Rawls Business Leadership Program and his finance courses to look at real-world business issues on an international level. He recently partnered with Alexandria Lyon and Matthew Parkin to discuss Europe's dilemma with the euro, and how that could positively impact the U.S. and China.

Alexandria Lyon is a senior Marketing major with an emphasis in Supply Chain Management. Alex is involved in various organizations throughout campus and the Rawls College of Business. She is an active member of the Rawls Business Leadership Program, Rawls Business Ambassadors, Tech Supply Chain Association, Women in Business, and Alpha Chi Omega. Alex had the opportunity to intern with Lockheed Martin Aeronautics in Ft. Worth last summer. Post internship, Alex accepted a full-time offer in Lockheed Martin's Operational Leadership Developmental Program and will begin her two-year rotational program after she graduates this May. Alex will start her first rotation working with the Mission Systems and Training division located in Syracuse, New York.

Matthew Parkin is a senior Finance major, and he is scheduled to graduate in May. During his time at the Rawls College, Matthew has succeeded in the classroom, where he has achieved Dean's List during the Spring 2012 and Spring 2014 semester. Outside the classroom, Matthew is actively involved with Texas Tech Cheerleading, serving as an assistant head coach for the all-girls squad.

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Bad News from Europe Could Potentially Benefit the U.S. and China

During the last two weeks, there has only been bad news emerging from Europe. First, the Swiss Central Bank (SCB) removed the cap over the exchange ratio with the euro. Second, the European Central Bank (ECB) plans to inject more than 1.3 trillion euros to counter the threat of a deflationary spiral.

However, if we try to read between the lines, the real problem is the disappointing macroeconomic data from different community members for 2014 and 2015. Both the SCB and the ECB took unexpected measures to ease the impact in the market, but more importantly in the European people. First, it is assumed that the decision made by the SCB was coordinated with the ECB, it is clear. If the ECB'S decision was before the SCB's decision, several millions of Euros could have flown to Zurich to take advantage of the cap at the 1.2 francs per euro. In fact, the SCB's decision caused a significant cost to the Swiss economy. The cap policy was assumed to be strong and credible for all of the local and international agents interacting in that economy. Mid-size to small businesses heavily relied on this and did not take any measure against exchange rate risk; thus, generating significant losses in the real sector. So as a first conclusion, the ECB and the SCB were coordinating their decisions, and the SCB was able to take these economic and political costs. Concurrently, political costs in Switzerland have yet to be measured. Impact on corporations' financial statements and credibility of both the capital market and varying financial institutions remains unidentified.

At the same time, the ECB'S decision miscalculated the amount of money they will be printing in reality. In fact, the ECB will be printing at least 20 percent more than the amount suggested by Mario Draghi: potentially causing the need of support from the U.S. and China. Perhaps it is time for Europe to ask for help. If not, more money will fly from Europe to secure markets such as the U.S., and the bank ruled by Mario Draghi will have to implement additional measures to aid European members. Nevertheless, the European Stock Market had a positive reaction to the announcement and helped retain euros rather than let them fly away. But what is the risk in Draghis proposal? Smaller economies in Europe are expected to not follow the stability rules and, with elections nearing, it is unlikely different economies will comply - generating the need for additional economic rescue, money printing and recovery time for Europe as a whole.

The rescue from China and the U.S. could come by investing in the stock market and capitalizing banks and companies: in particular, U.S. banks which are in good shape after turmoil from the subprime crisis. Additionally, new reserve regulations could be a good opportunity for both U.S. and European Banks. Diversifying their portfolio could lead to a much needed loaning procedure for small and mid-size businesses at the other side of the Atlantic.

China has enough reserves to help the ECB and buy their bonds in a repo agreement for long term. Also, negotiating some tax agreements could potentially facilitate China's direct investment in European companies, providing much needed consolidation of Mario Draghi's plan. It is impossible to save all of the countries of the Union, but, by changing the expectations of a few, the capital outflows will cease and additional money could aid European businesses and markets. Finally, the decisions of the SCB and ECB are not enough. Countries in this economic union are influenced by diverse and complex political situations. The threat of diminishing success of the plan and the hopes that no new measures will have to be taken, and must stay in consideration.

This supports the efforts outlined in the Rawls College of Business Strategic Plan. Learn more about the LEADER 2020 Strategic Plan and follow our progress on Twitter at #RawlsLeads.