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C. Chandrasekhar
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July 21, 2010
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The crises in financial markets, the sovereign debt crisis in some of the European countries in particular, divert our attention from the real economy. We tend to forget that the EU is largest economy in the world in terms of size of GDP (> $16 trn) and volume of trade (> $ 4 trn).
Despite the turbulence in financial markets, the GDP growth rate in EU is expected to be around 2% - a decent rate considering the size of the economy. The EU-wide industrial production has increased by 9.4% in the last quarter (12.6% in Germany). Exports have become cheaper, but at the same time, imports have also increased with a nominal trade deficit, indicating that manufacturing sector is doing well. The success of recent sovereign bond issues in Spain, Portugal and Italy has attracted investment flows, as the returns elsewhere in the developing world are shrinking.
The results of stress tests on 91 European banks, due on Friday, are widely expected to be positive, boosting investors’ confidence in Euro.
Therefore, do not write off Euro, but look towards Euro/USD at 1.35 levels very soon.