Current international financial events and implications

Financial Event

Briefing to the CEO of the Levis Corporation: Strike now, increase investment in Europe!

Inflation concerns run rampant in Europe as well as in America. On June 8, the European Central Bank raised its benchmark interest rate by a quarter-point, to 2.75%. This will make investment and borrowing on credit less attractive for major multinational corporations, such as ours, and the ordinary consumer, on which the corporation's lifeblood depends. Additionally, the United States Federal Reserve Bank, because of fears of inflation and concerns about Middle East instability and the escalating price of oil, also seemed intent upon future interest rates hikes. It is likely to continue its pattern of raising rates in the near future.

These actions by the two major world banks seem to be part of a larger international trend, regarding credit. The central banks in South Africa, India, Denmark and South Korea and Turkey did have raised their rates as well.

The European Central Bank's decision was based, much like the Fed's earlier rate hikes, on the fact that inflation in nations that use the euro currency had accelerated to an annual rate of 2.5% in May. However, in comparison with the United States, such an inflation hike was deemed to be "a snail's pace of tightening," by investors. (Dougherty, 2006) Also, Europe seems less keen on further rate increases, unlike the Fed. The EU is said to be "close to its trend potential rate," meaning that the European bank may consider the possibility that "a humming European economy" would make the bank willing to allow an increase inflation "as companies pass on higher prices to eager buyers." (Dougherty, 2006) Despite the rate hike, the European Central Bank deliberately avoided saying that it would sharply tighten credit to control inflation.

At present, global stock markets in general seem to be nervous, and expanding investments in almost any region may seem to be a dicey prospect. However, the willingness of the European central bank to tolerate a higher rate of inflation might mean that this is an ideal time to increase investment into the European economy to boost likely flags in future American sales. Even if the prices of consumer staples such as gas continue to escalate in America and in Europe, this is less likely to deter European consumers, given that such cost-of-living budgetary issues such high fuel costs have long become acceptable to European consumers, and because public transportation is better funded within the EU. The fears of competitors regarding European investment may actually be a potential boon, given that they will temporarily lessen the threat of competition in the present environment, and the fact that European spending seems to be continuing, unabated -- hence the fears of inflation.

Conclusion