For those requiring further proof that the balance of power within the global economy has shifted to China and away from the US, todayÃ¢â‚¬â„¢s surge in the markets should provide ample evidence that change is afoot. Describing as Ã¢â‚¬Å“groundlessÃ¢â‚¬Â rumors that China was questioning its stake in European holdings, a statement posted on the State Administration of Foreign Exchange website noted that Ã¢â‚¬Å“Europe has been, and will be one of the major markets for investing ChinaÃ¢â‚¬â„¢s exchange reservesÃ¢â‚¬Â.
Investors were so emboldened by this shot of confidence, the resulting buying spree lifted the Standard & Poors 500 Index back above 10,000 points soon after the market opened. The endorsement also helped reverse the euroÃ¢â‚¬â„¢s slide that had been threatening to hit a four-year low.
Commodities also gained with crude for July delivery jumping 3.3 percent to $73.88 a barrel by mid-day trading in New York. This helped the Canadian dollar regain some of its recent losses to its US counterpart when investors abandoned the Ã¢â‚¬Å“loonieÃ¢â‚¬Â for the perceived safety of the greenback earlier in the week. By 11:00 AM in New York, the Canadian currency was up more than a cent and half to 94.70 US cents.
ChinaÃ¢â‚¬â„¢s showing of support for the euro was without question, largely responsible for todayÃ¢â‚¬â„¢s new-found optimism, but events in Europe itself also contributed to the positive mood. Announcing plans to trim spending, two of the EUÃ¢â‚¬â„¢s Ã¢â‚¬Å“problem childrenÃ¢â‚¬Â were clearly hoping to send a message to investors Ã¢â‚¬â€œ but also the EU and the International Monetary Fund Ã¢â‚¬â€œ that they were confronting their respective budget gaps.
By a margin of a single vote, SpainÃ¢â‚¬â„¢s parliament approved a plan that would reduce government spending by 15 billion euros (US$18.4 billion). Italy also recently outlined spending cuts totaling 24 billion euros (US$37.3 billion) over the next two years. It would seem that all it takes is an economic crisis of unmatched precedence, to help EuropeÃ¢â‚¬â„¢s chronic over-spenders see the light and take actions towards greater financial responsibility. If only that were true.
Unfortunately, I believe it is a little early to proclaim that Italy and Spain have seen the light. The measures barely received government approval in Spain, and ItalyÃ¢â‚¬â„¢s Prime Minister Silvio Berlusconi is also facing pressure at home to ease up on all the talk about spending cuts. WeÃ¢â‚¬â„¢ll see how resolute the respective leaders are if and when they face the same level of public outcry witnessed in Greece.
- 46 billion euros (US$56)
- 5.3% of GDP
- Spending cuts = 24 billion euros over two years
- 100 billion euros (US$122)
- 11.4% of GDP
- Spending cuts = 15 billion euros