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At Last, Respect for the Euro?


Euro-zone companies and investors have spent more than $450 billion making acquisitions or buying bonds and equities in the U.S. over the past three years. That huge flow of funds across the Atlantic largely explains why the euro has lost more than 20% of its value against the dollar since its launch on Jan. 1, 1999. But in recent months, the trend has been reversed (chart). Money is now being switched back into Old World assets, suggesting the euro may finally make up some lost ground this year.

Starting in July, 2001, the six-month average of portfolio investments into Europe turned positive and has continued to rise since then. This includes equities, bonds, and money-market investment. More than $90 billion net moved from abroad into euro zone equities in the five months from July through November, 2001, according to London-based HSBC Bank PLC (HBB-CL). And while euro-zone institutions are still net purchasers of U.S. fixed-income securities, that could soon change, too. European companies increasingly prefer to issue bonds rather than borrow money from their banks, and could attract more money from abroad. Also, euro-zone governments are running up bigger budget deficits that will need financing. Adding to the euro zone's allure: Short-term interest rates there are substantially higher there than in the U.S.

According to Robert Prior-Wandesforde, HSBC's European economist, money is moving back into the euro zone because investors on both sides of the pond are skeptical that the U.S. downturn is over. "If the U.S. economy really has bottomed, the 2001 recession would be one of the shortest and mildest on record," he says. Moreover, Prior-Wandesforde doubts that euro zone companies will embark on another big U.S. spending spree so long as the country is suffering from major overcapacity.

Credit Suisse First Boston Corp. chief economist Giles Keating now predicts the euro will appreciate by up to 10% in 2002 after a lackluster start to the year. Such a rise for the sickly single currency would be good news after its bad beginning and attract even more foreign investors to Europe. Having trouble finding a doctor? A study points out that the U.S. has fewer physicians per dollar of gross domestic product than most countries in the Organization for Economic Cooperation & Development. Moreover, the study, which was published in the January/February, 2002, issue of Health Affairs, a well-respected policy journal, argues that the U.S. is likely to face an increasingly serious shortage of physicians over the next two decades.

That's far different from the conventional wisdom, which is based on earlier reports commissioned in the 1990s by the Council on Graduate Medical Education. These studies had forecast a surplus of physicians, based on the predicted demand for physician visits and procedures.

But the authors of the latest study-- Richard A. Cooper, Prakash Laud, and Heather J. McKee at the Health Policy Institute of the Medical College of Wisconsin and Thomas E. Getzen at Temple University--point out that the demand for medical services over the past 70 years has grown 50% faster than GDP. Taking into account the number of medical school graduates, the number of foreign doctors, and the ongoing substitution of nurse practitioners, physicians' assistants, and nurse-midwives for physicians, they calculate that the U.S. will have a shortage of 50,000 physicians in 2010. If these trends continue, the shortage will rise to 200,000 in 2020, more than 20% of total demand.

Of course, it could turn out that the U.S. manages to slow down increases in health-care spending, despite rising GDP. That could reduce the demand for physicians. But given the recent history of rising health-care costs, such a scenario doesn't seem likely. The consensus among economic forecasters is that the economy is close to bottoming out. Nevertheless, personal bankruptcies will continue to rise through the third quarter of 2002, according to a report from Morgan Stanley Dean Witter & Co.

The number of bankruptcies follows roughly the same path as unemployment, observes Kenneth Posner, consumer credit analyst at Morgan Stanley and author of the study. "If people are losing jobs, they'll have much greater difficulty in keeping up with their bills," he says. The firm expects unemployment to peak at around 6.5% in the second quarter. Bankruptcies should probably top out the following quarter, at about 450,000 or so, a 29% increase from the third quarter of 2001 (chart).

In some ways, this would not be as bad as previous downturns. From the peak to the trough of the past six business cycles, bankruptcies climbed by 60%, according to Posner. This time, he estimates, they may rise only about 50%. Indeed, there's some evidence that, outside of auto loans, consumers are taking on debt at a slower rate. Revolving credit, a fair proxy for credit-card debt, grew only 5% in November, 2001, compared with a year earlier. That's far slower than its 12% growth at the end of 2000.

Nevertheless, banks may continue to be too generous with consumer loans. "Big credit-card companies are still mailing out millions of promotional credit-card offers with favorable interest rates," Posner says. These credit-card offers could backfire as more people lose their jobs, driving the bankruptcy rate even higher than expected.


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