A Single Eurozone Budget

A consensus has begun to emerge that there be one budget for the entire eurozone. The region’s finance ministers will meet shortly. However, it is difficult to imagine why Germany, the strongest economy in the region, would agree to tying it fortunes to the balance of the region in any way. And leaders among the eurozone nations have been unable to agree on most other initiatives to help the financial plight of many countries in the alliance. So, why should something as complex as a budget among so many nations work?

According to Reuters:

The single budget proposal was first sketched out by Herman Van Rompuy, the president of the European Council, in a paper circulated in September as part of an effort to stimulate debate about how Europe’s monetary union should be improved.

In the paper, Van Rompuy said a “fully fledged fiscal union” among the 17 countries that share the euro could involve the creation of a single treasury office and “a central budget whose role and functions would need to be defined”.

Japanese Cars in China

The Nikkei newspaper reports that Japan’s big three car makers have cut production for China by half as the two countries remain at odds over ownership of a few small islands. Toyota Motor Corp. (NYSE: TM), Honda Motor Co. Ltd. (NYSE: HMC) and Nissan have suffered large drops in sales. Since China is the world’s largest car market, the dispute, which has caused the drop in demand, may hurt these firms nearly as much as the Japanese earthquake, if the dispute lasts for months. Japanese car companies continue to play catchup in China behind market leaders General Motors Co. (NYSE: GM) and Volkswagen. Every large manufacturer in the world has set high goals for sales in the People’s Republic. The market share competition does not include China’s own car companies, which also are anxious to expand.

Earnings Forecasts

According to the Financial Times:

Analysts expect earnings for the period ended September to decline, the first negative result after 11 consecutive quarters of gains.

Hardly any prominent analyst has not taken this bit of news as the single largest threat to the fierce rally that has taken the market to multiyear highs. But the curiosity is that stock market prices often are said to be based on the anticipation of the conditions of the economy and earnings six months out. With the possibility of the fiscal cliff raising taxes and harming consumer growth, it is hard to see how this sentiment can be true. And consensus is building that stock prices may collapse between now and the end of the year, as their values are undermined by sharp drops in earnings.

Douglas A. McIntyre

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